25 sets forth the following “measurement principle” for the measurement of tion cost related to stock option, purchase, and award plans: compensa-Measurement Principle—Compensation for s
Trang 136.8 SOURCES AND SUGGESTED REFERENCES
American Academy of Actuaries, “An Actuary’s Guide to Compliance with Statement of Financial AccountingStandards No 87.” AAA, Washington, DC, 1986
, “Actuarial Compliance Guideline for Statement of Financial Accounting Standards No 88.” ActuarialStandards Board, Washington, DC, 1989
Accounting Principles Board, “Accounting for the Cost of Pension Plans,” APB Opinion No 8 AICPA, NewYork, 1966
, “Accounting Changes,” APB Opinion No 20 AICPA, New York, 1971
, “Reporting the Results of Operation—Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,” APB Opinion No 30 AICPA,New York, 1973
Accounting Standards Executive Committee, “Accounting for and Reporting of Postretirement Medical Benefit(401(h)) Features of Defined Benefit Pension Plans,” Statement of Position 99-2 AICPA, New York, 1999.Financial Accounting Standards Board, “A Guide to Implementation of Statement 87 on Employers’ Accountingfor Pensions: Questions and Answers.” FASB, Stamford, CT, 1986
, “A Guide to Implementation of Statement 88: Questions and Answers.” FASB, Norwalk, CT, 1988
Reconciliation of Funded Status
7 (Accrued)/Prepaid Postemployment Benefit Cost at Year End ($26,000,000)
*SFAS No 112 did not allow delayed recognition of the transition obligation.
Change in (Accrued)/Prepaid Postemployment Benefit Cost
1 (Accrued)/Prepaid Postemployment Benefit Cost at Prior Year End ($24,400,000)
2 Expense During Year*
4 (Accrued)/Prepaid Postemployment Benefit Cost at Current Year End ($26,000,000)
*Since SFAS No 43 applies to this plan, the annual expense is explicitly calculated as the sum of the service cost, interest cost, and amortization of unrecognized actuarial losses Were this a SFAS No 5 plan, the annual expense would equal the change in the actuarial reserve, adjusted for benefit payments made during the year
** Since the plan is unfunded, benefit payments are treated as employer contributions.
Exhibit 36.11 Illustration of SFAS No 112 accounting.
Trang 2, “Accounting and Reporting by Defined Benefit Pension Plans,” Statement of Financial Accounting dards No 35 FASB, Stamford, CT, 1980.
Stan- , “Employers’ Accounting for Pensions,” Statement of Financial Accounting Standards No 87 FASB,Stamford, CT, 1985
, “Employers’ Accounting for Settlements and Curtailments of Deferred Benefit Pension Plans and forTermination Benefits,” Statement of Financial Accounting Standards No 88 FASB, Stamford, CT, 1985. , “Employers’ Accounting for Postretirement Benefits Other than Pension,” Statement of Financial Ac-counting Standards No 106 FASB, Norwalk, CT, 1990
, “Accounting for Income Taxes,” Statement of Financial Accounting Standards No 109 FASB, walk, CT, 1992
Nor- , “Reporting by Defined Benefit Pension Plans of Investment Contracts,” Statement of Financial counting Standards No 110 FASB, Norwalk, CT, 1992
Ac- , “Employers’ Accounting for Postemployment Benefits,” Statement of Financial Accounting Standards
No 112 FASB, Norwalk, CT, 1992
, “Reporting Comprehensive Income,” Statement of Financial Accounting Standards No 130 FASB,Norwalk, CT, 1997
, “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” Statement of Financial counting Standards No 132 FASB, Norwalk, CT, 1998
Ac- , “Business Combinations,” Statement of Financial Accounting Standards No 141 FASB, Norwalk, CT,2001
Lorenson, Leonard, and Rosenfield, Paul, “Vested Benefits—A Company’s Only Pension Liability,” Journal of Accountancy, October 1983.
Munnell, Alicia H., Economics of Private Pensions The Brookings Institution, Washington, DC, 1982.
36.8 SOURCES AND SUGGESTED REFERENCES 36 49
Trang 4CHAPTER 37
STOCK-BASED COMPENSATION
Peter T Chingos, CPA
Mercer Human Resources Consulting
Walton T Conn, Jr., CPA
37.2 SCOPE OF APB OPINION NO 25 6
37.3 APPLICATION OF APB OPINION
Compensation Cost Based
on Cost of Treasury Stock 9
(ii) Vesting Contingent on
Continued Employment 10
(iii) Designation of
(iv) Impact of Renewals,
Extensions, and Other
Modifications of Stock
Options and Purchase
(v) Transfer of Stock or
Assets to a Trustee, Agent,
or Other Third Party 16
(vi) Awards of Convertible
(vii) Settlement of Awards 16
(viii) Combination Plans and
(i) Allocation ofCompensation CostRelated to Fixed Awards 22(ii) Allocation of
Compensation CostRelated to Variable Awards 22(e) Canceled or Forfeited Rights 22(f) Accounting for Income Taxes
under APB Opinion No 25 23(g) Other APB Opinion No 25 Issues 24(i) Time Accelerated
Restricted Stock
(ii) Applying APB Opinion
No 25 to Nonemployees 24(iii) Nominal Issuances 24
37.4 EARNINGS PER SHARE UNDER
(a) Basic Earnings per Share 25(b) Diluted Earnings per Share 25
37 1
Trang 537.1 HISTORY OF ACCOUNTING FOR
STOCK-BASED COMPENSATION
The nature and types of stock-based compensation plans and awards have constantly changed overthe years However, the two most significant problems in determining the appropriate accounting forsuch awards have remained the same:
(c) Diluted Earnings per Share
Computations for Fixed Awards 26
(d) Diluted Earnings per Share
Computations for Variable
Awards Subject Only to
(e) Diluted Earnings per Share
Computations for Variable
Awards Subject to
Performance-Based Vesting 27
37.5 ILLUSTRATIONS OF
ACCOUNTING UNDER
(ii) Accounting by Employer
for Compensation Expense 28
(iii) Accounting by Employer
for Federal Income Taxes 28
(iv) Accounting by Employer
for Earnings per Share 28
(ii) Accounting by Employer
for Compensation Expense 29
(iii) Accounting by Employer
for Federal Income Taxes 31
(iv) Accounting by Employer
for Earnings per Share 31
(ii) Accounting by Employer
for Compensation Expense 31
(iii) Accounting by Employer
for Federal Income Taxes 32
(iv) Accounting by Employer
for Earnings per Share 32
(v) Illustration of a Performance
(d) Book Value or Formula Award 37
(ii) Accounting by Employer
for Compensation Expense 37
(iii) Accounting by Employerfor Federal Income Taxes 37(iv) Accounting by Employerfor Earnings per Share 38(v) Illustration of a Formula
(f) Adjustments of Initial Estimates 46(g) Modifications to Grants 47(h) Options with Reload Features 48(i) Settlement of Awards 48(j) Tandem Plans and Combination
(a) Disclosure Requirements for
(b) Disclosures by CompaniesThat Continue to Apply the Provisions of APB Opinion
37.9 SOURCES AND SUGGESTED
Trang 61 Measurement of compensation cost (i.e., the determination of total compensation cost to be
al-located to expense for financial reporting purposes)
2 Allocation of compensation cost (i.e., the determination of the period(s) over which total
com-pensation cost should be allocated to expense and the method of allocation)
To be sure, employees are compensated by being awarded stock options when they tribute services However, their employers do not incur any cost in compensating them thatway, any more than they do in issuing previously unissued shares of their stock when they re-ceive money from new stockholders The preexisting stockholders are the ones who incur acost when employees are awarded stock options, first a cost of contingent dilution of theirownership interest and later a cost of actual dilution of their ownership interest A reportingentity should report the costs it incurs, not costs other entities incur Ironically, after centeringits consideration of reporting in connection with the awarding of employee stock options onthe concept of compensation cost, the FASB implicitly agreed that the employers incur nocost when compensating the employees when awarding the options, though they do incur acost in using up the services provided by the employees for which they are awarded options:
con-“ issuances of equity instruments result in the receipt of services, which give rise toexpenses as they are used in an entity’s operations.”1Compensation cost is therefore a mis-
nomer, and attempting to determine the amount and timing of such a nonexistent cost divertsattention away from determining the amount and timing of the cost of using up the servicesreceived from the employees The AICPA Accounting Standards Division made that point tothe FASB when the FASB was considering the issue The FASB explicitly ignored that advicewhen it issued its Invitation to Comment: It stated that AcSEC’s analysis is “ beyond thescope of this project.”2
The authoritative accounting literature addresses the accounting for stock-based compensation intwo pronouncements which are as follows:
1 APB Opinion No 25, “Accounting for Stock Issued to Employees” (AICPA, 1972) Also see
Interpretation of APB Opinion No 25, “Accounting for Stock Issued to Employees” (AICPA,1973)
2 Statement of Financial Accounting Standard No 123, “Accounting for Stock-Based
Compen-sation” (FASB, 1995)
The APB Opinion No 25 is applicable “to all stock option, purchase, award and bonusrights granted by an employer corporation to an individual employee .” The Opinion con-tains substantial guidance in the application of its provisions to such plans
Subsequent to the issuance of APB Opinion No 25, the trend toward the adoption by enterprises
of more complex plans and awards continued Of particular significance was the increase in thenumber of combination plans—plans that provide for the granting of two or more types of awards toindividual employees In many combination plans, the employee, or the enterprise, must make anelection from alternative awards as to the award to be exercised, thereby canceling the other awardsgranted under the plan
Following the issuance of APB Opinion No 25, there was also a significant increase in thenumber of plans that provided for the granting of variable awards to employees A variable award
is one that at the date the grant is awarded, either (1) the number of shares of stock (or the amount
of cash) an employee is entitled to receive, (2) the amount an employee is required to pay to ercise his rights with respect to the award, or (3) both the number of shares an employee is
ex-37.1 HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION 37 3
1FASB, Statement of Standards No 123, “Accounting for Stock-Based Compensation,” par 89
2FASB, Invitation to Comment, Accounting for Compensation Plans Involving Certain Rights Granted to Employees, May 31, 1984, par 155.
Trang 7entitled to receive and the amount an employee is required to pay, are unknown One of the mostpopular variable awards is the stock appreciation right (SAR) The SARs are rights granted thatentitle an employee to receive, at a specified future date(s), the excess of the market value of aspecified number of shares of the granting employer’s capital stock over a stated price The form
of payment for amounts earned under an award of SARs may be specified by the award (i.e.,stock, cash, or a combination thereof), or the award may permit the employee or employer toelect the form of payment
Notwithstanding the guidance provided in APB Opinion No 25, considerable ment continued to exist as to the appropriate method of accounting for variable awards As aresult, significant differences arose in the methods used by employers to account for variableawards, which led to numerous requests of the FASB for clarification In December 1978,the FASB provided this clarification through the issuance of FASB Interpretation No 28,
disagree-“Accounting for Stock Appreciation Rights and Other Variable Stock Option or AwardPlans,” an interpretation of APB Opinion No 25 In paragraph No 2 of the Interpretation,the FASB specifies that:
APB Opinion No 25 applies to plans for which the employer’s stock is issued as compensation orthe amount of cash paid as compensation is determined by reference to the market price of thestock or to changes in its market price Plans involving stock appreciation rights and other vari-able plan awards are included in those plans dealt with by [APB] Opinion No 25
The Interpretation provides specific guidance in the application of APB Opinion No 25 to able awards, particularly in those more troublesome areas where the greatest divergence in account-ing existed prior to its issuance
vari-However, APB Opinion No 25, as interpreted, failed to incorporate criteria that can be tently applied to all types of plans As a result, as new types of plans have evolved and changes in thetax laws have occurred, new interpretations and guidance have been required, resulting in a steadystream of pronouncements by the FASB and the EITF since 1978, as shown in Exhibit 37.1.The nature and the frequency of these additional pronouncements underscore the difficulties inapplying the primary pronouncements to the myriad of stock-based compensation awards that havearisen since their issuance
consis-To address this problem, the FASB undertook a major project in 1984 to reconsider the accountingfor stock-based compensation, whether issued to employees or issued to vendors, suppliers, or othernonemployees In October 1995, the FASB issued FASB Statement No 123, “Accounting for Stock-Based Compensation.” FASB Statement No 123 allows companies to retain the current approach setforth in APB Opinion No 25, as amended, interpreted, and clarified; however, companies are encour-aged to adopt a new accounting method based on the estimated fair value of employee stock options.Companies that do not follow the fair value method are required to provide expanded disclosures inthe footnotes Thus, the FASB settled on a compromise solution to a complex issue that had becomeextremely politicized The vast majority of entities have not elected the fair value method of account-ing for stock options Therefore, the financial statements of most companies include two presentations
of a company’s results of operations rather than the normal presentation of a single net income.FASB Statement No 123 was preceded by an exposure draft issued by the FASB that wouldhave required a new accounting method that results in reporting expense in connection with vir-tually all stock options issued to employees However, those who receive stock options believe
a requirement to change to the new method could threaten their stock options: The Wall Street
Journal reported that “FASB’s chairman Dennis Beresford says he scoffed at the
dooms-day arguments during a heated discussion aboard one corporate jet The executives he was bating invited him to exit the craft—at 20,000 feet.”3And Beresford himself reported that “
de-3John Helyar and Joann S Lublin, “Corporate Coffers Gush with Currency of an Opulent Age,” The Wall Street Journal August 10, 1998, p B.5.
Trang 837.1 HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION 37 5
FASB AND EITF PRONOUNCEMENTS SINCE 1978
1982 FASB FASB Technical Bulletin No 82-2: “Accounting for the Conversion of Stock
Options into Incentive Stock Options as a Result of the EconomicRecovery Tax Act of 1981”
1984 FASB FASB Interpretation No 38: “Determining the Measurement Date for Stock
Option, Purchase, and Award Plans Involving Junior Stock,” aninterpretation of APB Opinion No 25
1984 EITF EITF Issue No 84-13: “Purchase of Stock Options and Stock Appreciation
Rights in a Leveraged Buyout”
1984 EITF EITF Issue No 84-18: “Stock Option Pyramiding”
1984 EITF EITF Issue No 84-34: “Permanent Discount Restricted Stock Purchase Plans”
1985 EITF EITF Issue No 85-45: “Business Combinations: Settlement of Stock Options
and Awards”
1987 EITF EITF Issue No 87-6: “Adjustments Relating to Stock Compensation Plans”
1987 EITF EITF Issue No 87-23: “Book Value Stock Purchase Plans”
1987 EITF EITF Issue No 87-33: “Stock Compensation Issues Related to Market Decline”
1988 EITF EITF Issue No 88-6: “Book Value Stock Plans in an Initial Public Offering”
1990 EITF EITF Issue No 90-7: “Accounting for a Reload Stock Option”
1990 EITF EITF Issue No 90-9: “Changes to Fixed Employee Stock Option Plans as a
Result of Equity Restructuring”
1994 EITF EITF Issue No 94-6: “Accounting for the Buyout of Compensatory Stock
Options”
1995 EITF EITF Issue No 95-16: “Accounting for Stock Compensation Arrangements
with Employer Loan Features under APB Opinion No 25”
1995 FASB FASB Statement No 123, “Accounting for Stock-Based Compensation”
1997 EITF EITF Issue No 96-18, “Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services”
1997 EITF EITF Issue No 97-12, “Accounting for the Delayed Receipt of Option Shares
upon Exercise under APB Opinion No 25”
1997 EITF EITF Issue No 97-12, “Accounting for Increased Share Authorizations in an IRS
Section 423 Employee Stock Purchase Plan Under APB Opinion No 25”
1997 FASB FASB Technical Bulletin 97-1, “Accounting under Statement 123 for Certain
Employee Stock Purchase Plans with a Look-Back Option“
1999 EITF EITF Topic No D-83, “ Accounting for Payroll Taxes Associated with Stock
Option Exercises”
2000 EITF EITF Issue No 00-8, “Accounting by a Grantee for an Equity Instrument to
Be Received in Conjunction with Providing Goods or Services”
2000 EITF EITF Issue No 00-18, “Accounting Recognition for Certain Transactions
Involving Equity Instruments Granted to Other Than Employees”
2000 FASB FASB Interpretation No 44, “Accounting for Certain Transactions Involving
Stock Compensation”
2000 EITF EITF Topic No 91, “Application of APB Opinion No 33 and FASB
Interpretation No 44 to an Indirect Repricing of a Stock Option”
2000 EITF EITF Issue No 0012, “Accounting by an Investor for Stock-Based
Compensation Granted to Employees of an Equity Method Investee”
2000 EITF EITF Issue No 00-18, “Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company upon Exercise of aNonqualified Employee Stock Option”
2000 EITF EITF Issue No 00-16, “Recognition and Measurement of Employer Payroll
Taxes on Employee Stock-Based Compensation”
2001 EITF EITF Issue No 00-23, “Issues Related to the Accounting for Stock
Compensation under APB Opinion No 25 and FASB Interpretation No 44”
2001 EITF EITF Issue No 01-1, “Accounting for a Convertible Instrument Granted or
Issued to a Nonemployee for Goods or Services or a Combination ofGoods or Services and Cash”
2001 EITF EITF Topic No 93, “Accounting for Rescission of the Exercise of Employee
Stock Options”
Exhibit 37.1 Accounting pronouncements related to stock compensation plans and awards since 1978.
Trang 9the CEO of one of America’s most successful companies said that if the FASB was allowed
to finalize the draft as proposed ‘it would end capitalism’ ”4
To prevent this “disaster,” the U.S Congress prepared a bill entitled the Accounting StandardsReform Act, which, if enacted, would have required the SEC to pass on all new standards approved
by the FASB The bill stated, in part: “ any new accounting standard or principle, and any fication shall become effective only following an affirmative vote of a majority of a quorum ofthe member of the [Securities and Exchange] Commission.” The bill was proposed simply to pres-sure the SEC to prevent the FASB from making this particular exposure draft final
modi-When the FASB was considering accounting for stock-based compensation leading to the suance of FASB Statement No 123, it did not address practice issues related to Opinion No 25,because the Board had planned to supersede Opinion No 25 Because FASB Statement No 123did not supersede Opinion No 25, the FASB issued its Interpretation No 44 to address issues onthe application of Opinion No 25 in a number of circumstances Interpretation No 44 was de-veloped within the framework of Opinion No 25 and does not refer to the concepts in FASBStatement No 123
is-Interpretation No 44 became effective July 1, 2000 Except as noted next, it was to be plied prospectively to new awards, exchanges of awards in business combinations, modifica-tions to outstanding awards, and changes in grantee status that occurred on or after that date.The guidance about modifications to fixed stock option awards that directly or indirectly re-duce the exercise price of an award apply to modifications made after December 15, 1998 Theguidance about the definition of an employee apply to new awards granted after December 15,
ap-1998 The guidance about modifications to fixed stock option awards to add a reload featureapply to modifications made after January 12, 2000 To the extent that events covered by the In-terpretation discussed in this paragraph occur after the applicable date but before July 1, 2000,the effects of applying the Interpretation are to be recognized only prospectively Accordingly,
no adjustments are to be made on initial application of the Interpretation to financial statementsfor periods before July 1, 2000 Additional compensation cost measured on initial application ofthe Interpretation attributable to periods before July 1, 2000, is not recognized
The initial application of the guidance for awards to an entity’s nonemployee board of tors, if previously accounted for as awards to nonemployees and now required by the Interpreta-tion to be accounted for under Opinion No 25, is to be reported as a cumulative effect of achange in accounting principle
direc-Since companies continue to use the intrinsic value approach prescribed by APB Opinion No 25,the authors have separated the chapter into two distinct parts The first part will cover the application
of APB Opinion No 25 and its related interpretations and Emerging Issues Task Force (EITF) issues.The remainder of the chapter will address the application of FASB Statement No 123
37.2 SCOPE OF APB OPINION NO 25
FASB Interpretation No 44 addresses questions that have been raised as to whether Opinion
No 25 applies to accounting by the grantor of stock compensation to independent contractors orother service providers not employees of the grantor It states that Opinion No 25 applies tograntor employers for only stock compensation to those who meet the definition of employeeunder Opinion No 25 as amplified by Interpretation No 44
For purposes of applying Opinion No 25, a person is an employee if the grantor consistentlyrepresents the person to be an employee under common law, as illustrated in case law and underU.S Internal Revenue Service Revenue Ruling 87-14 For such a person to be a common lawemployee, the grantor must represent the person as an employee for payroll tax purposes How-
4Dennis R Beresford, “How to Succeed as a Standard Setter by Trying Really Hard,” Accounting Horizons, September 1997, p 83.
Trang 10ever, simply representing a person as an employee for payroll tax purposes is insufficient to dicate that the person is an employee for purposes of Opinion No 25.
in-An exception to the guidance in the preceding paragraph involves a grantor of stock pensation to a person who provides services to the grantor under a lease or co-employmentagreement between the grantor and another entity under which the grantor is not the employer ofrecord for payroll tax purposes Such a person is deemed to be an employee of the grantor underOpinion No 25 if all of the following criteria are met:
com-a The person is a common law employee of the grantor, and the other entity is contractually
re-quired to pay payroll taxes on the compensation paid to the person for services provided to thegrantor
b The grantor and the other entity agree in writing to all of the following:
1 The grantor has the exclusive right to grant stock compensation to the person for the
per-son’s services to the grantor
2 The grantor has a right to hire, fire, and control the activities of the person (The other
en-tity may have the same right.)
3 The grantor has the exclusive right to determine the economic value of the services
per-formed by the person (including wages and the number of units and value of stock pensation granted)
com-4 The person can participate in the grantor’s employee benefit plans, if any, on the same
basis as comparable employees of the grantor
5 The grantor agrees to and does remit funds to the other entity sufficient to cover the
com-plete compensation of the person, including all payroll taxes, on or before a contractuallyagreed date or dates
A nonemployee member of a grantor’s board of directors ordinarily does not meet that definition
of an employee However, application of Opinion No 25 is required to stock compensation granted
to such a person for services provided as a director if the person (a) was elected by the grantor’sshareholders or (b) was appointed to a board position to be filled by shareholder election when theexisting term expires Employee status is not involved for awards granted to people for advisory orconsulting services in a nonelected capacity or to nonemployee directors for services outside theirrole as directors, such as legal or investment banking advice or for loan guarantees
Except as indicated in the preceding paragraph, Opinion No 25 does not apply to the accounting
by a grantor for stock compensation granted to nonemployees For example, it does not apply to theaccounting by a corporate investor of an unconsolidated investee for stock options or awards granted
by the investor to employees of the investee accounted for under the equity method
Whether a person is an employee under Opinion No 25 is evaluated for consolidated cial statements at the consolidated group level Stock compensation based on the stock of anyconsolidated group member is accounted for under Opinion No 25 if the person meets the defi-nition of an employee for any entity in the consolidated group For example, Opinion No 25 ap-plies to the accounting in the consolidated financial statements for awards based on parent stockgranted to employees of a consolidated subsidiary, to awards in stock of a consolidated sub-sidiary granted to employees of the parent, and to awards based on a consolidated subsidiary’sstock granted to the employees of another consolidated subsidiary
finan-Opinion No 25 does not apply to accounting by an employer for stock compensation granted
to its employees (a) by another entity, such as an investee, based on that entity’s stock or (b) bythe employer based on the stock of another entity Though that would seem to apply to awardsbased on the stock of a subsidiary for purposes of reporting in the separate financial statements
of the subsidiary, Opinion No 25 does apply in such circumstances if the subsidiary is part ofthe consolidated group including the parent company for purposes of preparing its consolidatedfinancial statements
With a change in status of a grantee to or from that of an employee of the grantor while an
37.2 SCOPE OF APB OPINION NO 25 37 7
Trang 11outstanding stock option or award is retained by the grantee with no modification of any of itsterms, compensation cost under Opinion No 25 is measured as if the award were newly granted
at the date of the change in status Only the portion of the newly measured cost attributable tothe remaining vesting (service) period is recognized as compensation cost prospectively fromthe date of the change in status Further, no adjustment is made to compensation cost recognized
by the grantor before the change in status unless the award is forfeited unvested because thegrantee does not fulfill an obligation A modification made to a vested award’s terms as a result
of a change in status has no effect If the grantee terminates employment before vesting, the mulative estimate of compensation cost recorded in previous periods is reduced to zero by de-creasing compensation cost in the period of forfeiture
cu-If there is a change in status of a grantee to or from that of an employee of the grantor while
an outstanding stock option or award is retained by the grantee with a modification to the award
at the time the status is changed, the modified award is treated under Opinion No 25 as a newaward appropriate to the new status of the grantee Compensation cost thus measured is recog-nized in full over the remaining vesting (service) period, if any Compensation cost previouslyrecognized for the forfeited award, if any, is adjusted to zero in the period of forfeiture A mod-ification is deemed made if its terms would have required it to be forfeited on the change in sta-tus and the terms are then modified to continue the award The modification in effect reinstates
or extends the life of the award as a new award to the grantee immediately after the change instatus Similarly, a modification and an effective reinstatement of an award is made if the terms
of the award (or underlying plan) provide for the award to continue at the discretion of thegrantor and the grantee retains the award after the change in status
As an exception, a change in grantee status from an employee to a nonemployee as a directresult of a spin-off does not change the grantor’s accounting under Opinion No 25 This applies
to only awards granted and outstanding, including adjustments to those awards, at the date ofthe spin-off This exception does not apply to other kinds of transactions, such as sale by a par-ent company of a large enough percentage of the shares of a subsidiary requiring the parentcompany to deconsolidate the subsidiary
37.3 APPLICATION OF APB OPINION NO 25
(a) NONCOMPENSATORY AND COMPENSATORY PLANS The APB Opinion No 25
pro-vides that a plan must have the following four characteristics in order to be considered as pensatory:
noncom-1 Substantially all full-time employees meeting limited employment qualifications may
partici-pate (employees owning a specified percentage of the outstanding stock and executives may
be excluded)
2 Stock is offered to eligible employees equally on the basis of a uniform percentage of salary
or wages (the plan may limit the number of shares of stock that an employee may purchasethrough the plan)
3 The time permitted for exercise of an option or purchase right is limited to a reasonable
period
4 The discount from the market price of the stock is no greater than would be reasonable in an
offer of stock to stockholders or others
Because Opinion No 25 refers to a plan that qualifies under Section 423 of the U.S InternalRevenue Code as a noncompensatory plan, which permits discounts of up to 15%, such a planhas the characteristic required under item 4 Further, for a stock option with an exercise pricefixed at the date of grant, a discount of the exercise price of no more than 15% from the stockprice on that date is reasonable for application of item 4
Trang 12Section 423 of the U.S Internal Revenue Code permits a qualified employee stock purchaseplan to contain a look-back option A look-back option, for example, is a provision in an em-ployee stock purchase plan that establishes the purchase price as the lesser of the stock’s marketprice at the grant date or its market price at the exercise (purchase) date Because Opinion No.
25 states that a plan that qualifies under Section 423 is noncompensatory, a plan with a back option qualifies as noncompensatory under Opinion No 25
look-A compensatory plan is any plan that does not have all four characteristics of a noncompensatoryplan It should be recognized, however, that awards granted under compensatory plans do not neces-sarily result in recognition of compensation expense by the employer An employer recognizes com-pensation expense with respect to awards granted pursuant to a compensatory plan only if theapplication of the measurement principle results in the determination of compensation cost
(b) MEASUREMENT OF COMPENSATION: GENERAL PRINCIPLE Paragraph 10 of APB
Opinion No 25 sets forth the following “measurement principle” for the measurement of tion cost related to stock option, purchase, and award plans:
compensa-Measurement Principle—Compensation for services that a corporation receives as consideration
for stock issued through employee stock option, purchase, and award plans should be measured bythe quoted market price of the stock at the measurement date less the amount, if any, that the em-ployee is required to pay If a quoted market price is unavailable, the best estimate of the marketvalue of the stock should be used to measure compensation The measurement date for deter-mining compensation cost in stock option, purchase, and award plans is the first date on which areknown both (1) the number of shares that an individual employee is entitled to receive, and (2) theoption or purchase price, if any
When both of the factors specified in paragraph 10 of APB Opinion No 25 are known
at the grant or award date (i.e., a fixed award), total compensation cost for an award is measured at the grant date However, when either or both of these factors are not known at thegrant or award date (i.e., a variable award), an employer should estimate total compensation costeach period from the date of grant or award to the measurement date based on the quoted marketprice of the employer’s capital stock at the end of each period This latter point is clarified in FASBInterpretation No 28, which defines the compensation related to variable plan awards as:
The amount by which the quoted market value of the shares of the employer’s stock covered by thegrant exceeds the option price or value specified, by reference to a market price or otherwise, sub-ject to any appreciation limitations under the plan Changes, either increases or decreases, in thequoted market value of those shares between the date of grant and the measurement date [as defined
in APB Opinion No 25] result in a change in the measure of compensation for the right or award
(c) APPLICATION OF THE MEASUREMENT PRINCIPLE A proper understanding of the
mea-surement principle of APB Opinion No 25 (including the clarification set forth in FASB tion No 28) is essential to determining the appropriate accounting, including the amount ofcompensation expense to be recognized Paragraphs 11(a) through 11(h) of APB Opinion No 25, aswell as subsequent FASB and EITF pronouncements, contain guidance on the application of themeasurement principle, as discussed in the following paragraphs
Interpreta-(i) Measurement of Compensation Cost Based on Cost of Treasury Stock Paragraph 11(a)
states:
Measuring compensation by the cost to an employer corporation of reacquired (treasury) stock that isdistributed through a stock option, purchase, or award plan is not acceptable practice The only excep-tion is that compensation cost under a plan with all the provisions described in paragraph 11(c) may bemeasured by the cost of stock that the corporation (1) reacquires during the fiscal period for which thestock is to be awarded and (2) awards shortly thereafter to employees for services during that period
37.3 APPLICATION OF APB OPINION NO 25 37 9
Trang 13Thus compensation cost of an award of stock for current services may be measured by the cost
of reacquired treasury stock only if the above conditions and those specified in paragraph 11(c)(see below) of the Opinion are met Otherwise, compensation cost should be measured as of themeasurement date otherwise determined in accordance with the criterion set forth in paragraph 10
of the Opinion
(ii) Vesting Contingent on Continued Employment Paragraph 11(b) states:
The measurement date is not changed from the grant or award date to a later date solely by sions that termination of employment reduces the number of shares of stock that may be issued to
provi-an employee
This paragraph makes it clear that a requirement that an employee remain employed by the ing enterprise for a specified period of time in order for his rights to become vested under a stock-based compensation award does not preclude a determination, as of the grant or award date, of thetotal compensation cost to be recognized as an expense by the granting employer
grant-(iii) Designation of Measurement Date Paragraph 11(c) states:
The measurement date of an award of stock for current service may be the end of the fiscal period,which is normally the effective date of the award, instead of the date that the award to an employee
is determined if (1) the award is provided for by the terms of an established formal plan, (2) theplan designates the factors that determine the total dollar amount of awards to employees for theperiod (for example, a percent of income), although the total amount or the individual awards maynot be known at the end of the period, and (3) the award pertains to current service of the em-ployee for the period
The effect of this paragraph is to allow the designation of the end of a fiscal period as the surement date when all of the conditions specified in paragraph 11(c) are met, even though the actualawards to individual employees may not be determined until after the close of the fiscal period
mea-(iv) Impact of Renewals, Extensions, and Other Modifications of Stock Options and Purchase Rights Paragraph 11(d) states:
Renewing a stock option or purchase right or extending its period establishes a new measurementdate as if the right were newly granted
This paragraph reflects a very important concept Its application could result in measurement ofcompensation cost with respect to outstanding stock option or purchase rights upon their renewal orextension, even though no compensation cost was ascribable to the original award under the mea-surement principle of APB Opinion No 25 For example, any excess of the quoted market price of anemployer’s capital stock over the exercise price of a stock option at the date of renewal or extension
is compensation cost; this may require recognition of compensation cost in addition to any sation cost associated with the original award
compen-Paragraph 11(d) addresses “renewals” and “extensions” of stock purchase rights There are ifications other than renewals and extensions that could also have an impact on the accounting forpreviously granted awards
mod-The EITF Issue No 87-33, “Stock Compensation Issues Related to Market Decline,” addresses aseries of issues related to modifications to stock option and award plans as a result of market decline.The EITF’s consensus on these issues generally precludes reversals of previously recognized com-pensation expense when outstanding awards are modified because of market value declines and, inmany instances, require measurement and recognition of compensation cost for both the original andthe modified award
Trang 14FASB Interpretation No 44 addresses several issues related to modifications to stock optionand award plans that change the life of the award through an extension of the exercise period or
a renewal, decreases the exercise or purchase price of the award, or increases the number ofshares the grantee is entitled to receive, including the addition of a reload feature
A modification that renews a fixed award or extends the award’s period (life), including amodification contingent on a future separation from employment, results in a new measurement
of compensation cost the same as a newly granted award Any intrinsic value at the modificationdate in excess of the amount measured at the original measurement date is recognized as com-pensation cost over the remaining future service period if the award is unvested, or immediately
if the award is vested, for any employee who could benefit from the modification
A modification that increases the life of an option award on separation from employment, butnot beyond the original maximum contractual life of the award, is an extension of the award atthe date the separation occurs and the life of the award is extended The intrinsic value of theaward is measured at the date of the modification, and any intrinsic value in excess of theamount measured at the original measurement date is recognized as compensation cost if theseparation occurs If the award vests and is exercised before the separation, any incremental in-trinsic value at the date of the modification is not recognized, because the life of the award hasnot been extended Attribution of additional compensation cost may require estimates, and ad-justment of the estimates may be necessary in later periods
If the original terms of the award provide for vesting to be accelerated at the discretion of thegrantor (or on some other discretionary basis), subsequent acceleration of vesting is a modifica-tion In contrast, if vesting is accelerated based on the occurrence of a specific event or condi-tion in accordance with the original terms of the award, for example, if the original terms of anaward specify that vesting is accelerated on retirement, death, or disability, no modification hasbeen made and no new measurement of compensation cost is required
A fixed stock option award may be subject to a modification by having its exercise price
re-duced (commonly called repricing) The exercise price has been rere-duced if the fair value of the
consideration required to be remitted by the grantee on exercise is less than or potentially lessthan the fair value of the consideration required of the grantee according to the original terms ofthe award Such an award is accounted for as variable from the date of the modification to thedate the award is exercised, forfeited, or expires unexercised
An exercise price can be reduced indirectly For example, the grantor can give the grantee acash bonus arrangement that is paid only if and when the award is exercised This is an example
of a combined stock award and cash bonus arrangement, discussed below Or the grantor canallow the grantee to exercise the award with a full-recourse note that does not bear the marketinterest rate If the exercise price has been reduced indirectly, the guidance in the precedingparagraph applies
A grantor can directly or indirectly modify an award by reducing the exercise price gent on the occurrence of a specified future event or condition, for example, if a certain earningstarget or stock price is achieved in the future Such a modification causes the award to be vari-able for the remainder of its outstanding life regardless of whether the triggering event occurs orthe contingency provisions expires without the contingency occurring In contrast, the originalterms of a stock option award may provide for a reduction to the award’s exercise price if aspecified future event or condition occurs If so, variable accounting is applied from the date ofgrant A measurement date would occur and variable accounting would stop when the contin-gency is resolved or the contingency provision expires
contin-A grantor can, in effect, cancel an option award, for example, by modifying its terms to duce or eliminate the likelihood that the grantee will exercise the option, such as by increasingthe exercise price or curtailing the remaining life of the award Any such modification is a can-cellation
re-A grantor can indirectly reduce the exercise price of a fixed stock option award by canceling oreffectively canceling it or settling it for cash or other consideration and granting a replacementaward at a lower exercise price, either before or after the cancellation or effective cancellation If a
37.3 APPLICATION OF APB OPINION NO 25 37 11
Trang 15cancellation and an award are combined that way, the replacement award is given variable ing until it is exercised, is forfeited, or expires unexercised.
account-An option award cancellation is combined with another option award with a lower exerciseprice and results in an indirect reduction to the exercise price of the combined award if the otheraward is granted to the grantee within one of the following periods:
a The period before the date of the cancellation that is the shorter of six months or the period
from the date of the grant of the canceled option
b The period ending six months after the date of the cancellation
To identify the replacement award that becomes subject to variable accounting on the cellation of an award, the grantor first looks back in the period before the cancellation described
can-in (a) above If the award was granted durcan-ing that period with an exercise price below that of thecanceled award, the award and the canceled award are combined If canceled options remainthat were not combined with a replacement award in the look-back period, the grantor thenlooks forward to the period described in (b) above If an award is granted during that period at
an exercise price below that of the canceled award, the award and the canceled award are bined When looking backward and then forward, options granted at dates closest to the date ofcancellation are first identified as the replacement award If the replacement award is identified
com-in the look-back period, variable accountcom-ing for the award begcom-ins at the cancellation date period financial statements are not restated if the award was accounted for as a fixed award inthose statements
Prior-Nevertheless, an oral or written agreement or implied promise by the grantor to compensatethe grantee for any increase in the market price of the stock after a cancellation but before grant
of a replacement award requires variable accounting for the replacement award regardless of theamount of time between the cancellation and the replacement grant Any agreement between thegrantor and the grantee when an option award is granted to cancel at a future date another out-standing option award requires variable accounting for the newly granted award from the date
of grant
The preceding also applies to the cancellation of an option award that has been accounted for
as variable because of a reduction to that award’s exercise price through a prior modification.But any option award granted during the look-back and look-forward periods, regardless of theexercise price of the replacement award, is eligible to be the replacement award Thus, any re-placement or modified award that has been accounted for as a variable award retains that status
A cancellation of a fixed stock option award and the grant of stock results in a new measurement
of compensation cost for the stock grant The exercise price has been effectively reduced to zero.Variable accounting does not therefore apply to the replacement award Any excess of the number ofshares underlying the canceled fixed stock option award over the number of shares of the replace-ment stock award is subject to the guidance in the immediately preceding paragraphs
An equity restructuring is a nonreciprocal transaction between an entity and its shareholders,such as a stock dividend, spin-off, stock split, rights offering, or recapitalization through a spe-cial, large, nonrecurring dividend that causes the market value per share of the stock underlyingthe option award to decrease Such a restructuring may adjust the exercise price, the number ofshares, or both of outstanding stock options or awards (Ordinary cash dividends or distributionsare not equity restructurings for this purpose.) The grantor may reduce the exercise price, in-crease the numbers of shares under the award, or both, to offset the decrease in the per shareprice of the stock underlying the award No accounting consequence results from such an equityrestructuring if both of the following are met:
1 The aggregate intrinsic value of the award immediately after the change is not greater than the
aggregate intrinsic award immediately before the change
2 The ratio of the exercise price per share to the market value per share is not reduced.
Trang 16If those criteria are not met, the modified award is accounted for under Opinion No 25 as variablefrom the date of the modification to the date the award is exercised, is forfeited, or expires unexercised.
If they are met but the terms of the original award have also been modified to either accelerate the ing or extend the life of the award, a new measurement of compensation cost is made at the date of themodification as if the award were newly granted Cash or other consideration provided to restore the eco-nomic position of the grantee as a result of an equity restructuring transaction is recognized as compen-sation cost The guidance concerning restructuring is applied without regard to whether the provisions ofthe stock option or award provide for adjustments to the terms in the event of an equity restructuring
vest-A modification that increases the number of shares to be issued under a fixed stock optionaward requires the award to be accounted for as variable from the date of the modification to thedate the award is exercised, is forfeited, or expires unexercised
A grantor that modifies a fixed stock option award to add a reload feature, which provides forthe grant of a new option award on the exercise of an existing award if specified conditions aremet, applies variable accounting for the modified award from the date of the modification to thedate the award is exercised, is forfeited, or expires unexercised The methods used to determinethe exercise price, the number of shares, and the life of the reload grant are irrelevant Variableaccounting is required for each additional grant that includes a reload feature under a reload fea-ture that provides for multiple subsequent grants through further reloads
Total compensation cost is measured as the sum of the following if a fixed stock option oraward is canceled or modified and a new measurement of compensation cost or variable ac-counting is required as a result of the modification:
a The intrinsic value of the award (if any) at the original measurement date
b The intrinsic value of the modified (or variable) award that exceeds the lesser of the intrinsic
value of the original award (1) at the original measurement date or (2) immediately before themodification
When a stock option or award is modified and a new measurement of compensation cost orvariable accounting is required, the remaining unrecognized original intrinsic value, if any, plusany additional compensation cost measured under (b) above is recognized over the remainingvesting (service) period, if any If the modified award is fully vested at the date of the modifica-tion, any additional compensation cost to be recognized is recognized immediately Recognizedcompensation cost for an award forfeited because an employee does not fulfill an obligation isreduced to zero by decreasing compensation cost in the period of the forfeiture
Additional compensation cost measured as of the modification date for modifications to ate vesting or to extend the life of an award on a specified future separation from employment (butnot beyond the award’s original maximum contractual life) for all awards for which the modificationresults in an effective term extension or an effective renewal Attribution of additional compensationcost may require estimates and adjustments of the estimates in later periods
acceler-Compensation cost is adjusted for increases or decreases in the intrinsic value of a modifiedaward that requires variable accounting in subsequent periods until the award is exercised, isforfeited, or expires unexercised Compensation cost is not, however, adjusted below the intrin-sic value (if any) of the modified stock option or award at the original measurement date unlessthe award is forfeited because the employee does not fulfill an obligation
If cash is paid to an employee to settle an outstanding stock option, to settle an earlier grant of astock award within six months after vesting, or to repurchase shares within six months after exercise
of an option or issuance, total compensation cost is measured as the sum of the following:
• The intrinsic value of the stock option or award (if any) at the original measurement date
• The amount of cash paid to the employee (reduced by any amount of cash paid by the employee
to acquire the shares) that exceeds the lesser of the intrinsic value (if any) of the award (1) atthe original measurement date or (2) immediately before the cash settlement
37.3 APPLICATION OF APB OPINION NO 25 37 13
Trang 17The following guidance differs on whether the entity is a public entity or a private entity forthis purpose For this purpose, a public entity is any entity (a) whose securities trade in a publicmarket either on a stock exchange (domestic or foreign) or in an over-the-counter market, in-cluding securities quoted only locally or regionally, (b) that makes a filing with a regulatoryagency in preparation for the sale of any class of equity securities in a public market, or (c) that
is controlled by an entity that meets criterion (a) or (b) A subsidiary of a public entity or a lic entity with thinly traded stock follows the accounting for the public entity But an entity withpublicly traded debt but no publicly traded equity securities follows the accounting for a non-public entity
pub-For public reporting entities other than for shares expected to be repurchased at fair value forrequired tax withholding, variable accounting is required for a stock option or award with ashare repurchase feature if the shares are expected to be repurchased within six months after op-tion exercise or issuance of the shares For a repurchase feature that is a right held by the em-ployee to sell the shares back to the entity, variable accounting is required for the award if theright can be exercised within six months of issuance of the shares After an option is exercised,the employee bears the risks and rewards of ownership with respect to those shares (except that
if the consideration for exercise is a nonrecourse note, the substance is the same as a stock tion and the employee bears no risks or rewards of ownership in the shares received) A subse-quent repurchase of the shares by the entity (except within six months after option exercise orshare issuance) thus represents a separate transaction to acquire treasury stock that is accountedfor apart from the original stock option or award
op-If the grantor repurchases shares within six months of issuance or option exercise and the purchase was not expected by the grantor before the date of the repurchase, the grantor followsthe preceding guidance for cash settlement of an earlier award
re-If a share repurchase feature gives the employee the right to sell the shares back to thegrantor after option exercise or share issuance for a premium that is not fixed or determinableover the then-current stock price, that feature creates an arrangement that requires variable ac-counting, even if the share cannot be sold back to the entity within six months after option exer-cise or issuance If such a feature gives the employee the right to sell shares back to the entityfor a fixed dollar amount over the stock price but not within six months of issuance of theshares, the fixed premium is recognized as additional compensation cost over the vesting (ser-vice) period
For nonpublic reporting entities, variable accounting is not required for a stock option oraward with one of these share repurchase features:
• The stated share repurchase price is equal to the fair value of the shares at the date of chase, the employee cannot require the entity to repurchase the shares within six months of op-tion exercise or share issuance, and the shares are not expected to be repurchased within sixmonths after exercise or share issuance
repur-• The stated share repurchase price is not the fair value of the shares at the date of repurchase, butthe employee has made a substantial investment and must bear risks and rewards normally as-sociated with share ownership for at least six months
• Shares are repurchased for tax-withholding purposes at the grantor’s minimum statutory holding rates, including payroll taxes, applicable to supplemental taxable income
with-A substantial investment has been made for purposes of an award that contains a repurchase ture at other than fair value when the employee invests in a form other than services rendered to theentity an amount equal to 100% of the stated share repurchase price calculated at the date of grant Ifthe award is an option, a substantial investment therefore cannot be made before exercise of the op-tion Because the award is variable, compensation cost is recognized for any intrinsic value of the op-tion from the date of grant to the date a substantial investment has been made
fea-For purposes of paragraph 11(g) of Opinion No 25 for both public and nonpublic entities, to
Trang 18determine the variable amount not required, required tax withholding is defined as the ployer’s minimum statutory withholding rates for federal and state tax purposes, including pay-roll taxes applicable to such supplemental taxable income Withheld amounts in excess of thatrate do not represent the employer’s required tax withholding for this purpose.
em-If an election to repurchase shares on exercise in excess of the number necessary to satisfythe employer’s required tax withholding is at the discretion of the employee, variable account-ing is required from the date the award is granted to the date the award is exercised, is forfeited,
or expires unexercised If the terms of an award are silent on tax withholding, or if the chase of shares for tax withholding in excess of the number necessary to satisfy the employer’srequired tax withholding is at the discretion of the employer, variable accounting is not re-quired However, in either circumstance, if the employer exhibits a pattern of consistently ap-proving repurchases of excess shares, variable accounting is required from the date of grant forall awards under the plan
repur-If shares are repurchased on exercise of a fixed option award in excess of the number sary to satisfy the employer’s required tax withholding, a new measurement of compensationcost is required for the entire award
neces-Changes to the exercise price or the number of share of a fixed stock option award as a result
of an exchange of fixed stock option awards in a business combination accounted for by thepooling of interests method have no accounting consequence if both of the following are met atthe date of exchange:
a The aggregate intrinsic value of the options immediately after the exchange is no greater than
the aggregate intrinsic value of the options immediately before the exchange
b The ratio of the exercise price per option to the market value per share is not reduced
If those criteria are not met, a new measurement of compensation cost is required
Vested stock options or awards issued by an acquirer in a business combination accountedfor by the purchase method in exchange for outstanding awards held by employees of the ac-quiree are considered to be part of the purchase price paid by the acquirer for the acquiree andaccounted for under FASB Statement No 141 The fair value of the new (acquirer) awards areincluded as part of the purchase price
Unvested stock options or awards granted by an acquirer in a business combination counted for by the purchase method in exchange for stock options or awards held by employees
ac-of the acquiree are considered to be part ac-of the purchase price for the acquiree, and the fair value
of the new (acquirer) awards are included in the purchase price However, to the extent that vice is required after the consummation date of the acquisition in order to vest in the replace-ment awards, a portion of the intrinsic value (if any) of the unvested awards is allocated tounearned compensation and recognized as compensation cost over the remaining future vesting(service) period The amount allocated is based on the portion of the intrinsic value at the con-summation date related to the future vesting (service) period The amount is calculated as the in-trinsic value of the replacement awards at the consummation date multiplied by the fraction that
ser-is the remaining future vesting (service) period divided by the total vesting (service) period,which is the vesting period before the consummation date plus the remaining future period re-quired to vest in the replacement award Any intrinsic value of the replacement awards allocated
to unearned compensation cost is deducted from the fair value of the awards for purposes of theallocation of the purchase price to the other assets acquired
Awards granted under a plan subject to shareholder approval generally are not deemedgranted until approval is obtained, and, therefore, no measurement date can occur before then.However, if management and the members of the board of directors control sufficient votes toapprove the plan, a grant date and therefore a measurement date may be deemed to have oc-curred before shareholder approval, because approval then is merely a formality
Deferred tax assets recognized for temporary differences related to stock options or awards under
37.3 APPLICATION OF APB OPINION NO 25 37 15
Trang 19Opinion No 25 should not be adjusted for subsequent declines in the stock price Such assets are termined by the compensation expense recognized for financial reporting rather than by reference tothe expected future tax deduction, which would be estimated using the current intrinsic value of theaward A valuation allowance to reduce the carrying amount of the assets is established only if thegrantor expects future taxable income to be insufficient to recover the assets in the periods in whichthe deduction would otherwise be recognized for tax purposes.
de-A cash bonus and a stock option award are accounted for as a combined award if payment bythe grantor or refund by the employee of the cash bonus is contingent on exercise of the optionaward A cash bonus that is not fixed and that is contingent on exercise of an option award is ac-counted for as a variable award A fixed cash bonus that is contingent on exercise of a fixed op-tion award is accounted for as a combined fixed award with the cash bonus reducing the statedexercise price of the option award A cash bonus, regardless of whether it is fixed or variable,that is contingent on vesting of a stock option or award is accounted for as compensation costseparate from the stock option or award
(v) Transfer of Stock or Assets to a Trustee, Agent, or Other Third Party Paragraph 11(e)
states:
Transferring stock or assets to a trustee, agent, or other third party for distribution of stock
to employees under the terms of an option, purchase, or award plan does not change themeasurement date from a later date to the date of transfer unless the terms of the transferprovide that the stock (1) will not revert to the corporation, (2) will not be granted orawarded later to the same employee on terms different from or for services other than thosespecified in the original grant or award, and (3) will not be granted or awarded later to an-other employee
This paragraph reinforces the principle that the measurement date is the first date on which areknown both (1) the number of shares that an individual employee is entitled to receive and (2) the op-tion or purchase price, if any The authors are not aware of any awards that have been structured in amanner that has resulted in an acceleration of the otherwise determined measurement date as a result
of the application of paragraph 11(e)
(vi) Awards of Convertible Stock or Rights Paragraph 11(f) states:
The measurement date for a grant or award of convertible stock (or stock that is otherwise changeable for other securities of the corporation) is the date in which the ratio of conversion (orexchange) is known unless other terms are variable at that date (paragraph 10b) The higher ofthe quoted market price at the measurement date of (1) the convertible stock granted or awarded
ex-or (2) the securities into which the ex-original grant ex-or award is convertible should be used to sure compensation
mea-Awards to employees of convertible stock or rights to purchase convertible stock are not mon Nevertheless, this paragraph provides guidance in measuring the compensation cost of suchawards Further guidance can be found in FASB Interpretation No 38, “Determining the Measure-ment Date for Stock Option, Purchase, and Award Plans Involving Junior Stock,” an interpretation ofAPB Opinion No 25
com-(vii) Settlement of Awards Paragraph 11(g) states:
Cash paid to an employee to settle an earlier award of stock or to settle a grant of option to the ployee should measure compensation cost If the cash payment differs from the earlier measure ofthe award of stock or grant of option, compensation cost should be adjusted (par 15) The amountthat a corporation pays to an employee through a compensation plan is “cash paid to an employee
em-to settle an earlier award of sem-tock or em-to settle a grant of option” if sem-tock is reacquired shortly after
Trang 20is-suance Cash proceeds that a corporation receives from sale of awarded stock or stock issued on ercise of an option and remits to the taxing authorities to cover required withholding of incometaxes on an award is not “cash paid to an employee to settle an earlier award of stock or to settle agrant of option” in measuring compensation cost.
ex-The intent of this paragraph seems quite clear If an earlier award of stock or stock options is timately settled by cash payment to the employee, the amount actually paid is the final measure ofcompensation cost to be recognized by the employer, regardless of the amount of compensation costpreviously determined However, in practice, application of this paragraph has often proved difficultand, as a result, a number of EITF Issues have dealt with cash settlements of awards, as discussed inthe following paragraph
ul-EITF Issue No 84-13, “Purchase of Stock Options and Stock Appreciation Rights in a aged Buyout.” This pronouncement sets forth the EITF’s consensus that the “target company” in a
Lever-leveraged buyout should recognize compensation expense in the amount of cash paid by the targetcompany to acquire outstanding stock options and stock appreciation rights
EITF Issue No 85-45, “Business Combinations: Settlement of Stock Options and Awards.” Similar to the consensus in EITF Issue No 84-13, this consensus indicates thatwhen a target company settles outstanding stock options or awards “voluntarily, at the direc-tion of the acquiring company, or as part of the plan of acquisition, APB Opinion No 25 re-quires that the settlement be accounted for as compensation expense in the separate financialstatements of the target company.”
EITF Issue No 87-6, “Adjustments Relating to Stock Compensation Plans.” This consensus
addresses stock option plans that contain a cash bonus feature that provides for a reimbursement toemployees of the taxes payable as a result of the exercise of a nonqualified stock option (a “tax-offset bonus”) The consensus indicates that awards under such plans are variable awards Thus,the existence of a tax-offset bonus related to a stock option award requires that the entire award
(the stock option plus the cash bonus feature) be accounted for as a variable award, as the option
and the tax-offset bonus are viewed as a single variable award This consensus is consistent withfootnote 1 to FASB Interpretation No 28, “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans” which states, in part, “Plans under which an employee mayreceive cash in lieu of stock or additional cash upon the exercise of a stock option are variableplans for purposes of the Interpretation as the amount is contingent upon the occurrence of futureevents.” The significant point here is that two different awards, one being a fixed award and theother a variable award, should be accounted for as a single, variable award
much-needed guidance in accounting for formula-based plans, under which employees purchaseshares, or are granted options to acquire shares, of the employer’s common stock at a formulaprice The formula price is usually based on book value, a multiple of book value, or earnings.Additionally, the employee must sell the acquired shares back to the employer upon retirement
or other termination of employment, at a selling price determined in the same manner as theoriginal purchase price
Privately held companies only:
No compensation expense should be recognized for changes in the formula price during the ployment period “if the employee makes a substantive investment that will be at risk for a rea-sonable period of time.” This consensus applies to plans where the employee is allowed to resellall or a portion of the acquired shares to the company at fixed or determinable dates, as well asplans where the shares are resold to the company only upon retirement or other termination ofemployment
em-37.3 APPLICATION OF APB OPINION NO 25 37 17
Trang 21Privately held and publicly held companies:
If options are granted to employees to purchase shares at the formula price and the employees canresell the options, or the shares acquired upon exercise of the options, to the company upon retire-ment or other termination of employment, or at fixed or determinable dates, the consensus of theEITF is the same for both privately held and publicly held companies The consensus indicates thatcompensation expense should be recognized for increases in the formula price from the grant date
to the exercise date (i.e., the award should be accounted for as a variable award) The consensusfurther indicates that the expense previously recognized should not be reversed upon exercise ofthe option, and that “additional expense would be recognized if the shares are sold back to thecompany shortly after exercise, as required by paragraph 11(g) of APB Opinion No 25.”
The SEC observer at the EITF provided the following clarification of the SEC staff’s views ofbook value plans for publicly held companies:
The SEC Observer indicated that the SEC staff views a book value plan for a publicly held pany as a performance plan and noted that it should be accounted for like an SAR
com-As previously noted, a difference exists between accounting for book value purchase (and otherformula-based) awards by privately held and publicly held companies This difference, of course,raised questions as to the accounting to be applied to these types of awards when a privately heldcompany becomes publicly held This issue was subsequently addressed in EITF Issue No 88-6,
“Book Value Stock Plans in an Initial Public Offering.”
EITF Issue No 87-33, “Stock Compensation Issues Related to Market Decline.” This
consen-sus addresses a number of issues related to the October 1987 stock market decline, including “How
to account for the repurchase of an outstanding option and the issuance of a ‘new’ option.” The TaskForce consensus on this issue was that “paragraph 11(g) of APB Opinion No 25 does not apply if anexisting option is repurchased in contemplation of the issuance of a new option that contains termsidentical to the remaining terms of the original option except that the exercise price is reduced .”The consensus also indicates that “the cash paid to repurchase the original option represents addi-tional compensation that should be charged to expense in the current period.”
The effect of this consensus is to preclude an employer from decreasing compensation cost sociated with a stock option award, by “settling” the award through a cash payment that is less thanthe amount of compensation cost previously determined, and then granting a “new” option to thesame employee that contains terms identical to the remaining terms of the original option exceptthat the exercise price is reduced In the event such an arrangement were entered into, application ofthe consensus would (1) require the employer to charge the amount of the cash payment to expense
as-in the current period, (2) prohibit the reversal of previously recognized expense associated with theoriginal option, and (3) require continued amortization of any compensation measured at the origi-nal measurement date that had not been amortized and, additionally, could result in the measurement
of additional compensation expense associated with the “new” award
The consensus also requires similar accounting when an option is “repriced,” as opposed to thesituation described above where an option is canceled and reissued
EITF Issue No 88-6, “Book Value Stock Plans in an Initial Public Offering.” As previously
noted, EITF Issue No 87-23 addresses certain issues related to the accounting for stock purchaseawards to employees, where the purchase price is a formula price based on book value or earnings,and where the shares must ultimately be sold back to the company by the employee at a price deter-mined in the same manner as the original purchase price The consensus set forth in EITF Issue No.87-23 makes certain distinctions between privately and publicly held companies with respect to theaccounting for these types of awards