Stock Options Accounting Software

Akuntansi ESO untuk Opsi Saham Karyawan. Dengan David Harper Relevansi di atas Reliabilitas Kami tidak akan meninjau kembali perdebatan sengit mengenai apakah perusahaan harus mengeluarkan opsi saham karyawan Namun, kita harus menetapkan dua hal Pertama, para ahli di Dewan Standar Akuntansi Keuangan FASB ingin meminta Pilihan yang dikeluarkan sejak sekitar awal 1990-an Meskipun mendapat tekanan politik, pengeluaran menjadi sedikit banyak tidak dapat dihindari ketika Dewan Akuntansi Internasional IASB memintanya karena dorongan yang disengaja untuk konvergensi antara standar akuntansi AS dan internasional Untuk bacaan terkait, lihat Kontroversi Over Option Expensing. , Di antara argumen ada debat yang sah mengenai dua kualitas utama relevansi informasi akuntansi dan keandalan Laporan keuangan menunjukkan standar relevansi ketika mencakup semua biaya material yang dikeluarkan oleh perusahaan - dan tidak ada yang secara serius menyangkal bahwa opsi tersebut adalah biaya Biaya yang dilaporkan dalam Keadaan keuangan Ments mencapai standar keandalan ketika diukur dengan cara yang tidak bias dan akurat. Dua kualitas relevansi dan reliabilitas ini sering kali bentrok dalam kerangka akuntansi. Misalnya, real estat dikenai biaya historis karena biaya historis lebih dapat diandalkan namun kurang relevan daripada Nilai pasar - yaitu, kita dapat mengukur dengan keandalan berapa banyak yang dihabiskan untuk mengakuisisi properti Penentang pengeluaran untuk memprioritaskan keandalan, bersikeras bahwa biaya opsi tidak dapat diukur dengan akurasi yang konsisten FASB ingin memprioritaskan relevansi, percaya bahwa hampir benar dalam menangkap biaya Lebih penting daripada yang salah dalam menghilangkannya sama sekali. Keterbukaan yang Diperlukan Tapi Bukan Pengakuan Untuk Sekarang Sampai dengan bulan Maret 2004, peraturan saat ini FAS 123 mewajibkan pengungkapan namun tidak mengakui Ini berarti bahwa perkiraan biaya biaya harus diungkapkan sebagai catatan kaki, tapi juga Tidak harus diakui sebagai biaya pada laporan laba rugi, di mana mereka akan melakukannya Mengurangi laba laba atau laba bersih yang dilaporkan Ini berarti bahwa kebanyakan perusahaan benar-benar melaporkan empat nomor laba per saham EPS - kecuali jika mereka secara sukarela memilih untuk mengenali opsi karena ratusan telah melakukannya. Pada Laporan Laba Rugi.1 EPS 2 EPS dilusian.1 Pro Forma Dasar EPS 2 Pro Forma EPS dilusian. EPS yang dimilki Captures Beberapa Pilihan - Itu Yang Lama dan Dalam Uang Tantangan utama dalam menghitung EPS adalah potensi dilusi Secara khusus, apa yang kita lakukan dengan pilihan yang luar biasa namun tidak dieksekusi, pilihan lama yang diberikan pada tahun-tahun sebelumnya Yang dapat dengan mudah dikonversi menjadi saham biasa setiap saat Hal ini berlaku untuk tidak hanya opsi saham, tetapi juga hutang konversi dan beberapa derivatif EPS dilusian mencoba untuk menangkap potensi pengenceran ini dengan menggunakan metode saham treasury yang digambarkan di bawah perusahaan hipotetis kami memiliki 100.000 saham Saham beredar, tapi juga memiliki 10.000 pilihan beredar yang semuanya ada dalam uang. Artinya, mereka diberi harga latihan 7 tapi sahamnya telah terjual. Nce naik menjadi 20. Saham biasa EPS laba bersih umum adalah sederhana 300.000 100.000 3 per saham EPS dilusian menggunakan metode treasury-stock untuk menjawab pertanyaan berikut secara hipotetis, berapa banyak saham biasa akan beredar jika semua opsi dalam mata uang dieksekusi. Hari ini Pada contoh yang dibahas di atas, latihan itu sendiri akan menambahkan 10.000 saham biasa ke basis Namun, simulasi latihan tersebut akan memberi perusahaan hasil latihan ekstra sebesar 7 per pilihan, ditambah manfaat pajak Manfaat pajak adalah uang riil karena perusahaan Mendapatkan untuk mengurangi penghasilan kena pajak dengan keuntungan opsi - dalam hal ini, 13 per opsi yang dilakukan Mengapa Karena IRS akan mengumpulkan pajak dari pemegang opsi yang akan membayar pajak penghasilan biasa atas keuntungan yang sama Harap perhatikan manfaat pajak mengacu pada non Opsi saham yang memenuhi syarat Pilihan saham insentif yang disebut ISO mungkin tidak dapat dikurangkan dari pajak untuk perusahaan, namun kurang dari 20 opsi yang diberikan adalah ISO. Mari melihat bagaimana 100.000 saham biasa menjadi 103 , 900 saham dilusian dengan metode treasury-stock, yang, ingat, didasarkan pada latihan simulasi Kami mengasumsikan penggunaan 10.000 opsi dalam bentuk uang ini sendiri menambahkan 10.000 saham biasa ke basisnya tetapi perusahaan tersebut memperoleh hasil latihan kembali dari 70.000 7 harga pelaksanaan per opsi dan manfaat pajak tunai sebesar 52.000 13 mendapatkan tingkat pajak 40 x 5 20 per opsi Itu adalah potongan kas 12 20 uang tunai, sehingga untuk berbicara, per opsi untuk potongan harga total 122.000 Untuk menyelesaikan simulasi, kami Asumsikan semua uang ekstra digunakan untuk membeli kembali saham Pada harga saat ini 20 per saham, perusahaan membeli kembali 6.100 saham. Singkatnya, konversi 10.000 opsi hanya menciptakan 3.900 saham tambahan bersih 10.000 opsi yang dikonversi dikurangi 6.100 saham buyback di sini. Adalah formula sebenarnya, di mana harga pasar saat ini M, harga latihan E, tarif pajak T dan jumlah opsi N dilakukan. EPS Forma Capture Opsi Baru yang Diberikan Selama Tahun Kami telah meninjau bagaimana EPS dilusian menangkap efek outstandi. Atau pilihan uang lama yang diberikan pada tahun-tahun sebelumnya Tapi apa yang kita lakukan dengan opsi yang diberikan pada tahun fiskal berjalan yang memiliki nilai intrinsik nol, dengan asumsi harga pelaksanaan sama dengan harga saham, namun mahal harganya karena mereka memiliki Nilai waktu Jawabannya adalah bahwa kita menggunakan model penetapan harga opsi untuk memperkirakan biaya untuk menciptakan biaya non-kas yang mengurangi laba bersih yang dilaporkan. Sedangkan metode treasury-stock meningkatkan penyebut rasio EPS dengan menambahkan saham, pengeluaran pro forma mengurangi Pembilang EPS Anda dapat melihat bagaimana pengeluaran tidak dihitung ganda karena beberapa di antaranya menyarankan EPS yang dilusian menggabungkan hibah pilihan lama sementara pengeluaran pro forma menggabungkan hibah baru. Kami meninjau dua model terkemuka, Black-Scholes dan binomial, dalam dua angsuran berikutnya dari Seri ini, namun pengaruhnya biasanya menghasilkan perkiraan nilai wajar biaya yang berkisar antara 20 dan 50 dari harga saham. Meskipun peraturan akuntansi yang diusulkan yang mengharuskan pembelanjaan adalah Sangat rinci, tajuk utama adalah nilai wajar pada tanggal pemberian hibah Ini berarti FASB ingin meminta perusahaan untuk memperkirakan nilai wajar opsi pada saat pemberian dan catatan mengetahui bahwa biaya pada laporan laba rugi Perhatikan ilustrasi di bawah ini dengan perusahaan hipotetis yang sama. Kami melihat di atas 1 EPS dilusian didasarkan pada pembagian laba bersih yang disesuaikan 290.000 menjadi basis saham dilusian 103.900 saham Namun, dengan pro forma, dasar saham yang dilutif dapat berbeda Lihat catatan teknis kami di bawah untuk keterangan lebih lanjut. Pertama, kita dapat melihat bahwa kita masih Memiliki saham biasa dan saham yang dilusian, di mana saham yang dilusian mensimulasikan pelaksanaan pilihan yang diberikan sebelumnya Kedua, kita telah mengasumsikan lebih lanjut bahwa 5.000 opsi telah diberikan pada tahun berjalan. Mari asumsikan perkiraan model kami bahwa harganya 40 dari 20 harga saham, Atau 8 per pilihan Dengan demikian, biaya totalnya adalah 40.000. Ketiga, karena pilihan kita terjadi pada ranjau di empat tahun, kita akan amortisasi biaya selama empat tahun ke depan. Ini adalah prinsip pencocokan akuntansi dalam tindakan yang menjadi gagasan bahwa karyawan kita akan menyediakan Layanan selama periode vesting, sehingga biaya dapat disebarkan selama periode tersebut Meskipun kami belum menggambarkannya, perusahaan diperbolehkan mengurangi biaya untuk mengantisipasi opsi kerugian Karena pengakhiran karyawan Misalnya, perusahaan dapat meramalkan bahwa 20 opsi yang diberikan akan dibatalkan dan mengurangi biaya yang sesuai. Beban tahunan saat ini untuk hibah opsi adalah 10.000, 25 biaya pertama dari 40.000. Dengan demikian, laba bersih disesuaikan kami oleh karena itu 290.000 Kita membagi ini menjadi saham biasa dan saham yang diencerkan untuk menghasilkan set kedua bilangan proforma EPS Ini harus diungkapkan dalam catatan kaki, dan kemungkinan besar akan memerlukan pengakuan di badan laporan laba rugi untuk tahun fiskal yang dimulai setelah 15 Des , 2004.A Catatan Teknis Akhir untuk Berani Ada beberapa teknis yang patut disebutkan, kami menggunakan basis saham terdilusi yang sama untuk perhitungan EPS yang dilusian melaporkan EPS dilusian dan EPS pro forma dilusian. Secara teknis, di bawah item ESP yang diformulasikan pro forma iv di atas Laporan keuangan, basis saham selanjutnya meningkat dengan jumlah saham yang dapat dibeli dengan biaya kompensasi yang tidak diamortisasi, selain ex Hasil pajak dan manfaat pajak Oleh karena itu, pada tahun pertama, karena hanya 10.000 dari 40.000 opsi yang dikeluarkan, 30.000 lainnya secara hipotetis dapat membeli kembali 1.500 saham tambahan 30.000 20 - pada tahun pertama - menghasilkan jumlah yang diencerkan Saham 105.400 dan EPS dilusian 2 75 Tapi di tahun yang akan datang, semua yang lain sama, tingkat ketiga di atas akan benar karena kita sudah selesai membayar 40.000 Remember, ini hanya berlaku untuk EPS pro forma yang dilusian dimana kita berada. Membayar pilihan di pembilang. Opsi Pengeluaran Kreditur hanyalah usaha terbaik untuk memperkirakan biaya biaya Pendukung benar mengatakan bahwa pilihan adalah biaya, dan menghitung sesuatu lebih baik daripada tidak menghitung apa-apa. Tapi mereka tidak dapat mengklaim perkiraan biaya akurat Pertimbangkan perusahaan kami Di atas Bagaimana jika saham merpati sampai 6 tahun depan dan tetap di sana Maka pilihannya akan sama sekali tidak berharga, dan perkiraan biaya kami akan berubah secara signifikan terlalu berlebihan. Sementara EPS kami akan berkurang Sebaliknya, jika stoknya lebih baik dari perkiraan, jumlah EPS kami akan dibesar-besarkan karena biaya kami akan berubah menjadi understated. Option123 LLC adalah penyedia pilihan opsi saham karyawan, perangkat lunak penilaian dan Layanan penilaian di Amerika Serikat Perangkat lunak kami telah digunakan oleh 400 pelanggan di seluruh dunia, termasuk perusahaan Fortune 500, firma BPA besar seperti bisnis besar, 4, serta banyak usaha kecil hingga menengah sejak ditemukan pada tahun 1999. Dengan keunggulan kami di Microsoft Excel VBA dan makro, kami juga menyediakan solusi canggih untuk opsi terkait isu-isu yang dapat dipertimbangkan menantang Microsoft Excel R untuk akuntan, profesional keuangan dan manajer bisnis. Perangkat Lunak untuk Opsi Saham Karyawan. Solusi sederhana untuk profesional keuangan pada Penilaian opsi yang rumit dan lebih jauh. Administrasi, Penilaian, Pelaporan. Informasi dasar. Pilih model yang tepatPer FAS123 R. Per ASC 718 FAS123R. Binomial Model Variable Inputs. Black-Scholes Option Calculator. Binomial Model Calculator Simulation. Calculator model penetapan harga opsi. Terms dapat berubah tanpa pemberitahuan tertulis sebelumnya Hubungi kami via Email. Option123 Excel v 6 0, versi standar, dan OptionX, online Versi selanjutnya, Option123 atau Program dirancang untuk membantu perusahaan dalam melacak dan menilai rencana opsi saham karyawan, serta menghitung laba bersih per saham dan mempersiapkan laporan interim, Formulir 10 Q, dan laporan tahunan, Formulir 10 K, oleh Mengikuti Pernyataan Standar Akuntansi Keuangan No 123 Revisi 2004, Pembayaran Berbasis Saham FAS 123 R, digantikan oleh FASB ASC Topik 718 - Kompensasi Saham, Standar Akuntansi Keuangan No 128, Laba Per Saham FAS 128, Standar Akuntansi Keuangan No 148, Akuntansi Transisi dan Pengungkapan Kompensasi berbasis Saham merupakan amandemen Pernyataan FASB No 123 FAS 148, serta Securities Exchange Act of 1934. Selain membantu c Perusahaan memasarkan rencana ekuitas mereka, Option123 mengotomatisasi penyelesaian nilai wajar opsi saham dengan menggunakan model penetapan harga opsi termasuk Model Harga Binomial dan Model Penawaran Hitam-Scholes menghitung nilai wajar dari opsi atau penghargaan serupa berdasarkan asumsi masukan perusahaan Anda Nilai wajar masing-masing Hibah dihitung dengan menggunakan Model Binomial Model dan Black-Scholes Option Pricing Model pada saat yang sama, jika semua input yang dibutuhkan dimasukkan Simulasi pohon binomial dapat dilakukan untuk setiap hibah tunggal dengan input konstan yang digunakan selama keseluruhan atau input variabel dimasukkan secara terpisah. Pada masing-masing simpul Volatilitas historis juga dihitung pada saat yang sama, jika begitu dipilih. Perhitungan EPS menghitung kenaikan saham dan EPS dengan mengikuti ASC 718 atau FAS 123 R dan FAS 128. Informasi opsi penyembunyian dan opsi memberikan informasi pengungkapan minimum dan opsi informasi pemberian , Seperti yang dipersyaratkan oleh ASC718 atau FAS 123 R, SEC, untuk mengajukan Formulir 10K, Laporan Tahunan Ini termasuk info ringkasan Rmasi opsi awam yang dapat dieksekusi, informasi rata-rata tertimbang, opsi pemberian opsi Agregat seperti yang dipersyaratkan dalam Formulir 10 K, Bagian II, Butir 5, serta informasi mengenai kompensasi eksekutif yang dipersyaratkan dalam Formulir 10K, Butir 11 Bagi perusahaan yang menggunakan tahun kalender Sebagai tahun fiskal, mereka diwajibkan untuk mengadopsi FAS 123 R atau ASC 718 pada awal periode sementara sementara yang dimulai setelah 15 Desember 2005 Sebelum itu, pengungkapan pro forma masih diperlukan bagi mereka yang belum mengadopsi FAS 123 R atau ASC Analisis sensitivitas memberikan setiap hibah tunggal dengan analisis sensitivitas dengan mengasumsikan perubahan harga saham aset, volatilitas, perkiraan masa pakai opsi, dan tingkat bebas risiko dengan menghitung 5 Delta Yunani, Gamma, Vega, Theta, dan Rho berikut. Pada saat yang sama ketika nilai wajar dihitung untuk setiap hibah Penjelasan penjelasan dari orang-orang Yunani ini tersedia secara rinci di bab berikutnya. Alokasi yang Berlebihan mengalokasikan total biaya yang terkait dengan Dengan penghargaan individu pada periode akuntansi yang tepat, dan menambahkan alokasi penghargaan individual oleh kelompok untuk membantu perusahaan dalam mengembangkan pengungkapan pendapatan bersih ASC 718 atau FAS 123 R Ini juga menyajikan informasi rata-rata tertimbang dan pengungkapan lainnya yang dipersyaratkan oleh ASC 718 atau FAS 123 R dan FAS 148. Pengendalian Harga Historis dan Harga Dividen yang Dinamis memungkinkan harga saham historis dan data dividen diunduh secara otomatis dari Internet. Gambaran Opsi Saham Karyawan dan Option123.Option123 menyediakan paket disederhanakan untuk mengelola rencana ekuitas mereka. Hal ini membuat semua informasi yang dibutuhkan Untuk mencatat semua kegiatan yang berkaitan dengan opsi, waran, atau penghargaan serupa, termasuk hibah, pembatalan pembatalan, latihan, masa berlaku, penilaian, perhitungan EPS dilusian, pengungkapan dan pelaporan semua opsi terkait kompensasi. EPS Perhitungan. Dewan Standar Akuntansi Keuangan mengeluarkan Pernyataan Standar Akuntansi Keuangan No 128, Laba Per Saham , Yang menyederhanakan standar perhitungan Ini memerlukan penyajian ganda EPS dasar dan dilusian pada laporan pendapatan dan memerlukan rekonsiliasi pembilang dan penyebut perhitungan EPS dasar terhadap pembilang perhitungan EPS yang dilusian Standar Akuntansi Keuangan Tidak 148, Akuntansi Transisi dan Pengungkapan Kompensasi Berbasis Saham, amandemen Pernyataan FASB No 123, juga mengubah persyaratan pengungkapan FAS 123 untuk mewajibkan pengungkapan terdepan dalam laporan keuangan tahunan dan interim mengenai metode akuntansi untuk kompensasi karyawan berbasis saham. Dan pengaruh metode berdasarkan hasil yang dilaporkan Selanjutnya, Pernyataan Standar Akuntansi Keuangan No 123 Revisi 2004, Pembayaran Berbasis Saham FAS 123 R, mengubah perhitungan EPS FAS 123, FAS 128, dan FAS 148 FAS 123 R telah digantikan Oleh FASB ASC Topik 718 - Stock Compensation. Basic EPS dihitung dengan membagi pendapatan yang tersedia untuk saham biasa. Pemegang dengan jumlah rata-rata tertimbang saham biasa yang beredar untuk periode EPS Dilusian mencerminkan konversi yang diasumsikan dari semua efek yang bersifat dilutif, termasuk opsi saham, waran, hutang konversi, dan saham preferen yang dapat dikonversi Option123 hanya berurusan dengan opsi opsi dilutif dan tidak mengacu pada konversi Hutang dan saham preferen yang dapat dikonversi karena sifat spesifik mereka Juga karena metode perhitungan relatif sederhananya, Option123 tidak menangani perhitungan jumlah rata-rata dasar dari saham biasa yang beredar dan EPS dasar. EPS yang disempurnakan mengukur kinerja suatu entitas selama periode pelaporan Ketika memberikan efek kepada semua saham komersil potensial yang dilutif dan beredar selama periode tersebut, penyebut mencakup jumlah saham biasa tambahan yang pasti beredar jika saham biasa yang dilutif telah dikeluarkan. Opsi saham mempengaruhi EPS dilusian bergantung pada Ketentuan vesting Rencana yang dikenakan Ct untuk ketentuan vesting berbasis kinerja atau kriteria vesting tambahan selain layanan lanjutan atau vesting terkait waktu diperlakukan sebagai saham yang dapat dikeluarkan secara kontinyu. Penghargaan yang hanya tunduk pada vesting terkait waktu diperlakukan serupa dengan opsi yang menggunakan metode stock treasury lihat halaman berikutnya. , Perhitungannya berbeda tergantung metode akuntansi yang dipilih oleh perusahaan untuk memperhitungkan penghargaan yang diberikan kepada karyawan. Panduan EPS yang berlaku untuk FAS 128 harus diterapkan dalam menghitung EPS untuk melaporkan laporan rugi pendapatan yang diminta oleh ASC 718 atau FAS 123 R. Efek dilutif dari opsi dan waran yang dikeluarkan oleh entitas secara umum harus dilaporkan dalam EPS dilusian dengan menggunakan metode treasury Opsi dan waran akan memiliki efek dilutif berdasarkan metode stock treasury hanya jika harga rata-rata saham biasa selama Periode pelaporan melebihi harga pelaksanaan opsi atau waran in-the-money Jika dalam seperempatnya Kenaikan harga rata-rata di atas harga pelaksanaan opsi, data EPS yang dilaporkan sebelumnya tidak dapat disesuaikan secara surut sebagai akibat dari perubahan harga pasar saham biasa. Opsi atau waran diam-diam yang dikeluarkan selama periode pelaporan atau yang kadaluarsa atau dibatalkan atau dilakukan. Selama periode pelaporan termasuk dalam penyebut EPS dilusian untuk periode sebenarnya dimana jumlahnya beredar. Di bawah metode treasury, semua opsi atau waran dalam uang diasumsikan dilakukan pada awal periode pelaporan atau pada saat Penerbitan, jika nanti Hasil penjualan harus diasumsikan digunakan untuk membeli saham biasa dengan harga pasar rata-rata selama periode tersebut. Selisih antara jumlah saham yang diasumsikan dikeluarkan dan jumlah saham yang diasumsikan dibeli, yang disebut saham tambahan, harus Termasuk dalam denominator perhitungan EPS yang dilusian. Di bawah Option123, harga pasar rata-rata adalah harga rata-rata sederhana setiap hari. Harga saham yang mungkin merupakan harga pembukaan, penutupan, tertinggi, terendah, rata-rata terbuka, atau harga rata-rata hi-lo, yang sepenuhnya sesuai kebijaksanaan pengguna Namun, Option123 hanya mengotomatisasi penghargaan dimana vesting didasarkan pada berlalunya waktu Untuk perhitungan saham non-vested, saham yang dapat dikeluarkan secara kontinyu, atau penghargaan yang dapat diselesaikan dengan saham atau uang tunai, maka diperlukan perhitungan yang terpisah. Silakan merujuk ke PSAK 128. EPS dilusian secara ketat dihitung dengan menggunakan harga saham rata-rata selama tiga bulan di Periode pelaporan Jika terjadi kerugian pada kuartal pelaporan, tidak ada saham tambahan yang harus disertakan dalam perhitungan EPS yang dilutif karena pengaruhnya bersifat anti-dilutif Untuk perhitungan tahunan dan tahunan ketika setiap kuartal menguntungkan, saham tambahan tersebut termasuk Dalam denominator adalah jumlah rata-rata sederhana dari saham tambahan di setiap kuartal dalam periode tahunan atau tahunan Namun, jika satu atau beberapa kuartal mengalami kerugian, tahun-to-date dan ann Penghasilan atau kerugian yang timbul dari operasi yang berlanjut harus digunakan untuk menentukan apakah operasi atau waran dalam uang masuk termasuk dalam penyebut. Oleh karena itu, walaupun opsi uang atau waran tidak dikecualikan dari satu atau lebih perempat untuk menghitung EPS peredaran kuartalan Karena efek anti-pengenceran, opsi atau waran opsi tersebut harus disertakan dalam perhitungan EPS tahunan atau yang dilusian selama tahun berlaku selama efek dilutif. Option123 menyediakan dua metode untuk menghitung EPS satu tahun yang menggunakan Rata-rata rata-rata periode sementara, dan yang lainnya menggunakan rata-rata tertimbang tahun ini dengan tanggal mulai selalu dimulai pada hari pertama tahun fiskal. Model Penentuan Harga. Ada dua model harga opsi yang tersedia dalam Program Binomial Option Pricing ini. Model Harga Pilihan Model dan Black-Scholes Per ASC 718 atau FAS 123 R, salah satu model dapat diterima walaupun draf Paparan terbaru dari Pembayaran Berbasis Saham merupakan Perubahan atas Pernyataan FASB No 123 Dan 95 menyebutkan preferensi FASB pada Model Harga Opsi Binomial, karena menawarkan fleksibilitas yang lebih besar yang dibutuhkan untuk mencerminkan karakteristik unik dari pilihan saham karyawan dan instrumen serupa Namun, Namun, FASB memahami bahwa entitas mungkin tidak tersedia dalam format informasi yang dapat digunakan Tentang pola latihan karyawan dan mungkin faktor lain yang diperlukan untuk memberikan masukan yang sesuai untuk model-model tersebut. Program menggunakan Model Harga Opsi Binomial secara default, namun Anda dapat memilih untuk menggunakan Model Pilihan Harga Black-Scholes. Model Harga Pilihan Bomomial. Binomial Model, juga disebut Lattice Model atau Model Pohon, pertama kali diperkenalkan oleh Cox, Ross, dan Rubinstein untuk harga opsi saham Amerika pada tahun 1979 Model ini membagi waktu menjadi opsi yang kadaluwarsa dalam sejumlah besar interval, atau langkah-langkah Pada setiap langkahnya, menghitung harga saham Akan bergerak naik atau turun dengan probabilitas tertentu Model ini juga memperhitungkan pertimbangan volatilitas saham yang mendasarinya, waktunya Sampai kadaluwarsa, tingkat bunga bebas risiko dan jumlah dividen menghasilkan. Perbedaan utama antara pilihan Amerika dan pilihan Eropa adalah fitur latihan awal setiap saat selama masa pilihan Amerika. Namun, fitur ini membawa kompleksitas yang substansial untuk tujuan penilaian Tidak seperti Black - Scholes Option Pricing Model, model penetapan harga tertutup untuk penilaian pilihan Eropa, tidak ada model model tertutup umum untuk pilihan Amerika. Untuk opsi Eropa atau penghargaan serupa, model Binomial yang digunakan dalam Program adalah bentuk dasar dengan menggunakan enam Variabel yang dibutuhkan oleh harga ASC 718 atau FAS 123 R. Stock. Harga ekspektasi. Istilah yang diharapkan, hasil yang dihitung dengan istilah kontrak sebagai masukan dalam model Binomial. Diperkirakan volatilitas saham mendasar selama masa kontrak. Suku bunga bebas bebas selama Kontrak, dan hasil dividen yang diharapkan selama masa kontrak. Di bawah model binomial, kehidupan yang diharapkan adalah keluaran yang dihitung dari model bentuk tertutup, yaitu Black-Scholes Model di mana istilah yang diharapkan adalah sebuah masukan. Contoh metode yang dapat diterima untuk tujuan pengungkapan laporan keuangan memperkirakan istilah yang diharapkan berdasarkan hasil model kisi adalah dengan menggunakan nilai wajar perkiraan opsi kisi model dari opsi saham Sebagai masukan untuk mod bentuk tertutup el, dan kemudian untuk memecahkan model bentuk tertutup untuk istilah yang diharapkan Metode lain juga tersedia untuk memperkirakan istilah yang diharapkan. Dalam mode binomial lainnya, keputusan lain yang harus dilakukan adalah berapa langkah waktu untuk Gunakan dalam penilaian yaitu berapa banyak waktu yang lewat antara node Jumlah langkah bisa tidak terbatas secara teoritis karena pergerakan harga saham bisa tak terbatas untuk masa depan Umumnya, semakin besar jumlah langkah waktu, semakin akurat nilai akhirnya. Langkah-langkah waktu yang lebih banyak ditambahkan, peningkatan ketepatan akurasi menurun Jumlah langkah waktu lebih penting dalam model kisi yang kuat dimana diperlukan banyak langkah waktu untuk merancang model yang memadai. M struktur volatilitas dan tingkat suku bunga, serta perilaku karyawan-latihan. Untuk opsi Amerika atau penghargaan serupa, dua masukan lagi dapat dimasukkan. Faktor optimal dan tingkat penghentian masa depan. Misalnya, faktor latihan suboptimal 2 berarti Bahwa latihan umumnya diharapkan terjadi ketika harga saham menjadi dua kali harga opsi opsi saham Teori harga opsi pada umumnya berpendapat bahwa waktu optimal atau memaksimalkan keuntungan untuk menggunakan opsi pada akhir opsi adalah karena itu, Jika sebuah opsi dilaksanakan sebelum akhir masa jabatannya, latihan tersebut disebut sebagai latihan suboptimal suboptimal juga disebut sebagai latihan awal Olahraga suboptimal atau awal mempengaruhi jangka waktu yang diharapkan dari suatu pilihan. Terlepas dari teknik penilaian atau model yang dipilih, Entitas harus membuat estimasi yang masuk akal dan dapat diandalkan untuk setiap asumsi yang digunakan dalam model, termasuk opsi pembagian karyawan atau persyaratan yang diharapkan serupa, dengan mempertimbangkan Memperhitungkan baik jangka waktu kontrak opsi dan dampak dari latihan yang diharapkan karyawan dan perilaku penghentian pekerjaan pasca kerja. Penghapusan123 menyediakan dua pilihan untuk memasukkan semua masukan di bawah input konstan model Binomial selama jangka waktu kontrak dan masukan variabel dimasukkan ke masing-masing Node selama masa kontrak. Jika input konstan dipilih, asumsi untuk setiap masukan akan digunakan untuk keseluruhan istilah dalam penilaian Binomial. Jika asumsi masukan variabel dipilih dalam Program ini, kecuali Harga Latihan dan Harga Saham aset dasar, semua lainnya Input dapat dimasukkan secara berbeda pada setiap simpul sepanjang jangka waktu Seperti yang ditunjukkan pada diagram di bawah ini, masukan untuk tingkat bebas risiko, hasil dividen, volatilitas yang diharapkan, dan tingkat penghentian dimasukkan pada setiap simpul. Model Opsi Harga Kerugian-Scholes. Awal 1970-an, Fischer Black dan Myron Scholes melakukan terobosan besar dengan menurunkan persamaan diferensial yang harus berdasarkan harga turunan derivatif. Saham non-dividend-paying Mereka menggunakan persamaan untuk menghitung nilai untuk call dan put option Eropa pada saham. Pada tahun 1997, mereka dianugerahi Noble Prize. Untuk menghitung nilai opsi saham dengan menggunakan Black-Scholes Option Pricing Model, lima input Diperlukan harga saham, harga pelaksanaan, tingkat bebas risiko, waktu sampai tanggal kedaluwarsa, dan ketidakstabilan Black-Scholes Generalized Model memiliki satu asumsi lagi yang diharapkan hasil dividen - perusahaan membayar dividen terus menerus selama masa opsi Menurut ASC 718, FAS 123 R, atau FAS123, enam masukan diperlukan untuk menghitung nilai wajar opsi Model Generalisasi Black-Scholes digunakan di Option123 untuk menghitung nilai wajar opsi bagi perusahaan publik dan nilai opsi minimum untuk perusahaan non-publik. Black - Scholes Option Pricing Model adalah model teoritis yang paling sering disebutkan untuk menilai pilihan di dunia bisnis Model Harga Pilihan Black-Scholes standar dirancang untuk memperkirakan nilai saham yang dapat dipindahtangankan o Meskipun model telah digunakan oleh investor dan profesional kompensasi, namun juga semakin menonjol karena akseptabilitasnya sebagai model penilaian oleh FASB dan dalam peraturan proxy SEC Model ini awalnya dikembangkan untuk menilai jenis opsi yang dapat diperdagangkan, namun FASB juga yakin penggunaannya sesuai untuk menilai opsi saham karyawan. Nilai Tunda Options. Per ASC 718 atau FAS 123 R, jika harga pasar yang dapat diamati tidak tersedia untuk opsi saham atau instrumen sejenis dengan syarat dan ketentuan yang sama atau serupa, Entitas harus mengestimasi nilai wajar instrumen tersebut dengan menggunakan teknik penilaian atau model yang memenuhi persyaratan dan mempertimbangkan, paling tidak. Harga pelaksanaan opsi. Istilah yang diharapkan dari pilihan tersebut, dengan mempertimbangkan kedua istilah kontrak Dari pilihan dan dampak dari karyawan yang diharapkan latihan dan perilaku penghentian pekerjaan pasca vesting Dalam model bentuk tertutup, istilah yang diharapkan adalah asumsi yang digunakan dalam Atau masukan pada model, sementara dalam model kisi, istilah yang diharapkan adalah keluaran model. Harga saat ini dari saham yang mendasarinya. Volatilitas yang diharapkan dari harga saham yang mendasari untuk jangka waktu yang diharapkan dari opsi tersebut. Dividen pada bagian yang mendasari untuk jangka waktu opsi yang diharapkan. Suku bunga bebas risiko untuk jangka waktu opsi yang diharapkan. Di bawah Opsi123, nilai wajar opsi berbasis saham ditentukan dengan menggunakan Black-Scholes Option Pricing Model atau Binomial Model yang memperhitungkan harga saham pada tanggal pemberian opsi, harga pelaksanaan, masa opsi yang diharapkan, volatilitas saham dasar dan dividen yang diharapkan, dan tingkat bunga bebas risiko selama masa yang diharapkan dari Pilihan Jika model Binomial digunakan, faktor suboptimal, tingkat penghentian pasca vestasi dan jumlah langkah dapat dimasukkan sebagai masukan tambahan. Masukan yang diperlukan untuk menilai opsi berbasis saham disajikan pada lembar kerja Nilai Namun, tidak ada f Nilai udara dapat dihitung sampai semua asumsi dibuat di Front Page, semua input minimum dimasukkan ke dalam Lembar Nilai atau Pohon, dan semua data harga telah diunduh ke lembar kerja harga. Dua dari enam input yang dibutuhkan yang ditetapkan oleh FASB relatif mudah. Dan secara konsisten diterapkan untuk semua perusahaan Harga Saham pada tanggal hibah dan Harga Latihan umum jelas Harga latihan juga dapat disebut sebagai harga strike atau harga hibah Mereka semua dapat dipertukarkan dalam Manual. Volatilitas Perhitungan. Per ASC 718 atau FAS 123 R, masukan volatilitas selalu diperlukan untuk menilai penghargaan berbasis saham dengan Model Pilihan Binomial atau Black-Scholes Option Pricing Model Dari enam masukan yang dibutuhkan oleh dua model penentuan harga ini, volatilitas adalah perkiraan yang paling sulit. Volatilitas adalah Ukuran dari jumlah dimana harga saham telah berfluktuasi atau diperkirakan akan berfluktuasi selama periode waktu tertentu Seperti umumnya kasus ini, materialitas harus dipertimbangkan Ered ketika menetapkan tingkat presisi yang diperlukan untuk perkiraan ini Volatilitas bukan merupakan faktor beta stok Faktor beta mengukur fluktuasi harga saham relatif terhadap fluktuasi harga pasar, sedangkan volatilitas adalah ukuran dari perubahan harga saham sendiri relatif terhadap Periode sebelumnya. Option123 secara otomatis menghitung volatilitas berdasarkan harga saham historis harian, mingguan atau bulanan dan masa depan pilihan yang diharapkan Jika Anda memilih untuk tidak menggunakan volatilitas historis yang dihitung, Anda juga dapat memasukkan perkiraan volatilitas secara manual pada lembar kerja Value. Perhitungan Volatilitas historis dibangun di Program Setelah memasukkan data harga ke lembar kerja harga terkait dan memperkirakan perkiraan waktu opsi pada lembar kerja Value, volatilitas selama periode historis dengan panjang sama dengan perkiraan waktu opsi akan dihitung dan ditampilkan. Pada Value worksheet setelah Anda mengklik tombol Calculate Values. FAS123 merekomendasikan penggunaan paling sedikit 20-30 harga Pengamatan, dan lebih disukai lagi, untuk menghitung ukuran yang valid secara statistik Jika pengamatan, yang ditentukan berdasarkan perkiraan waktu pilihan dan interval waktu yang digunakan untuk menghitung volatilitas, kurang dari 20, Program akan mengingatkan Anda akan hal itu Anda dapat melanjutkan Hitunglah volatilitas nilai wajar untuk item hibah, bahkan pengamatannya kurang dari 20, selama perhitungannya dihitung secara matematis, pengamatannya lebih besar atau sama dengan 3. FASB mensyaratkan estimasi nilai wajar penghargaan berdasarkan pada perkiraan Ketidakstabilan atas perkiraan opsi ini Oleh karena itu, jika volatilitas berdasarkan fluktuasi harga historis tidak mewakili volatilitas yang diharapkan selama masa opsi yang diharapkan, penyesuaian terhadap volatilitas historis mungkin diperlukan. Alasan di balik penyimpangan dari volatilitas historis seharusnya dilakukan. Didokumentasikan. Untuk entitas yang saham biasanya baru-baru ini menjadi saham publik dan dalam kasus-kasus lain tertentu, cukup historis Data mungkin tidak tersedia untuk menghitung volatilitas Dalam situasi tersebut, volatilitas yang diharapkan dapat didasarkan pada volatilitas rata-rata entitas sejenis pada tingkat yang sebanding dalam sejarah mereka. Demikian pula, entitas yang saham biasa diperdagangkan untuk umum hanya beberapa tahun umumnya menjadi kurang Volatile karena lebih banyak pengalaman perdagangan telah diperoleh dan, oleh karena itu, mungkin menempatkan secara tepat bobot pada pengalaman baru-baru ini Entitas juga mungkin mempertimbangkan volatilitas harga saham entitas serupa. Selain itu, periode yang mengandung kejadian tidak berulang yang secara jelas menyebabkan efek abnormal pada perhitungan historis. Volatilitas seperti tawaran pengambilalihan yang gagal atau restrukturisasi besar yang terisolasi mungkin diabaikan untuk perhitungan historis tersebut. FASB mengakui bahwa kisaran ekspektasi volatilitas yang masuk akal mungkin ada Jika satu jumlah dalam kisaran tersebut merupakan perkiraan yang lebih baik daripada jumlah lainnya, seharusnya Digunakan Jika tidak, adalah tepat untuk menggunakan estimasi volatilitas yang diharapkan pada t Dia berada di ujung bawah kisaran yang wajar. Di Option123, asumsi ringkasan yang digunakan untuk perhitungan volatilitas disajikan di atas lembar harga Price History, Weekly Price, atau Monthly Price, tergantung pada jenis harga yang Anda pilih pada Front Page. Namun, Anda mungkin Tidak memanipulasi perhitungan volatilitas historis pada salah satu lembar kerja harga. FASB menyarankan agar pengamatan harga harus konsisten pada interval reguler, yaitu harian, mingguan, bulanan, dll, sehingga seharusnya tidak mengubahnya di masa depan begitu Anda memilih waktu yang tepat - Interval pada Front Page, kecuali interval lain memberikan perkiraan yang lebih baik. Oleh karena itu, satu-satunya alternatif untuk memanipulasi perhitungan volatilitas historis adalah dengan mengubah perkiraan pilihan opsi pada lembar kerja Value. Expected Life of Option. Kehidupan yang diharapkan dari pilihan adalah jumlah tahun yang diharapkan untuk Sebelum penerima hibah menggunakan pilihannya, hutang SAR dibayarkan dalam saham, atau penghargaan ekuitas serupa Seperti umumnya kasus ini, materialitas harus dipertimbangkan D saat menetapkan tingkat presisi yang diperlukan untuk perkiraan ini Kehidupan yang diharapkan kurang dari pada istilah kontrak, namun selalu setidaknya sepanjang periode vesting. Kehidupan yang diharapkan didasarkan pada beberapa faktor, termasuk pengalaman masa lalu perusahaan dengan penghargaan serupa. , Periode vesting penghargaan, volatilitas saham yang mendasarinya, dan ekspektasi saat ini Juga, saat memperkirakan pilihan yang diharapkan, mungkin akan membantu untuk memberi stratifikasi kepada penerima hibah jika ada kemungkinan perbedaan perilaku perilaku pilihan mereka. Faktor-faktor berikut yang perlu dipertimbangkan saat memperkirakan istilah yang diharapkan dari suatu pilihan. Periode vesting dari penghargaan tersebut. Latihan standar karyawan dan perilaku penghentian pekerjaan pasca-vesting untuk hibah serupa. Volatilitas yang diharapkan dari persediaan. Blackout period dan pengaturan lain yang ada bersamaan seperti Kesepakatan yang memungkinkan latihan untuk secara otomatis terjadi selama periode pemadaman jika kondisi tertentu terpenuhi. Usia karyawan, leng Layanan, dan yurisdiksi rumah tangga yaitu domestik atau asing. Data eksternal, jika data yang sesuai atau data internal tidak tersedia. Gabungan oleh kelompok karyawan yang homogen. Jika model Binomial dipilih di Option123, istilah yang diharapkan akan dihitung secara otomatis menggunakan Black - Model Scholes Namun, jika volatilitas yang diharapkan terlalu tinggi, katakanlah lebih besar dari 150 dalam beberapa kasus, perkiraan perkiraan yang dihitung mungkin tidak masuk akal dan Program dapat menggantinya dengan jangka waktu kontrak. Hasil Dividen Yang Diharapkan. Ini adalah hasil dividen tahunan yang diharapkan Selama perkiraan pilihan, dinyatakan sebagai persentase dari harga saham pada tanggal hibah Seperti umumnya kasus ini, materialitas harus dipertimbangkan saat menetapkan tingkat presisi yang diperlukan untuk perkiraan ini. Memperkirakan dividen yang diharapkan selama jangka waktu yang diharapkan dari Opsi tersebut memerlukan penilaian ASC 718 atau FAS 123 R memberikan panduan berikut untuk memperkirakan dividen yang diharapkan. Model penentuan harga pengeluaran umumnya memanggil Untuk hasil dividen yang diharapkan sebagai asumsi Namun, model dapat dimodifikasi untuk menggunakan jumlah dividen yang diharapkan dan bukan hasil. Suatu entitas dapat menggunakan hasil yang diharapkan atau pembayaran yang diharapkannya. Selain itu, pola dividen atau penurunan dividen entitas harus Sebagai contoh, jika suatu entitas secara historis meningkatkan dividen sekitar 3 persen per tahun, nilai opsi saham yang diperkirakan tidak boleh didasarkan pada jumlah dividen tetap selama jangka waktu opsi saham. Seperti asumsi lain dalam model penetapan harga opsi, Entitas harus menggunakan dividen yang diharapkan yang kemungkinan akan tercermin dalam jumlah di mana opsi akan dipertukarkan. Jika entitas memiliki riwayat kenaikan dividen di masa lalu yang diperkirakan akan berlanjut di masa depan, maka imbal hasil dividen saat ini seharusnya Dimodifikasi untuk mencerminkan harapan tersebut Jika entitas belum membayar dividen di masa lalu namun telah mengumumkan akan mulai membayar dividen Senting hasil tertentu yang harus digunakan sebagai hasil dividen yang diharapkan. Persetujuan untuk mencerminkan perubahan yang diharapkan dari hasil dividen saat ini umumnya harus didasarkan pada informasi yang tersedia untuk umum Namun, beberapa lintang diperbolehkan, dan jika entitas yang muncul tanpa riwayat pembayaran dividen Cukup mengharapkan untuk mengumumkan dividen selama masa opsi yang diharapkan, mungkin mempertimbangkan pembayaran dividen dari kelompok sebanding yang sebanding dalam menentukan asumsi dividen yang diharapkan, yang dibobot untuk mencerminkan periode dimana dividen diharapkan dibayarkan Jika dividen setara dibayarkan kepada Penerima beasiswa atau diterapkan untuk mengurangi harga pelaksanaan, hasil dividen nol harus digunakan. Dividen yang Diharapkan dengan Model Binomial Model binomial dapat disesuaikan untuk menggunakan jumlah dividen yang diharapkan dan bukan hasil dan oleh karena itu, juga dapat memperhitungkan Dampak perubahan dividen yang diantisipasi Pada Option123, jika metode input variabel dipilih, dividen yang diharapkan mungkin en Berbeda dengan masing-masing simpul selama keseluruhan periode kontrak, pendekatan semacam itu mungkin lebih mencerminkan dividen masa depan yang diharapkan, karena dividen tidak selalu bergerak selangkah demi selangkah dengan perubahan harga saham perusahaan. Perkiraan dividen yang diharapkan dalam model kisi harus ditentukan berdasarkan Panduan umum yang diberikan di atas. FASB mengakui bahwa berbagai harapan yang masuk akal mengenai hasil dividen mungkin ada. Jika satu jumlah dalam rentang tersebut merupakan perkiraan yang lebih baik daripada jumlah lainnya, sebaiknya digunakan jika tidak, adalah tepat untuk menggunakan perkiraan di Tingginya kisaran yang wajar untuk hasil dividen yang diharapkan, karena hubungan terbaliknya, akan menghasilkan estimasi nilai wajar yang paling rendah. Di Option123, jumlah dividen yang dimasukkan pada lembar harga Price, Price Price, atau Monthly Price digunakan untuk Perhitungan volatilitas, sedangkan Dividen Tahunan yang dimasukkan pada Lembar Kerja Nilai digunakan untuk menghitung nilai wajar opsi saham berbasis Variabel Imbal hasil dividen harus dimasukkan ke dalam lembar kerja Tree. Risk Free Rate. Untuk majikan AS, tingkat bunga bebas risiko adalah tingkat yang saat ini tersedia untuk nol-kupon masalah Pemerintah AS dengan jangka waktu yang tersisa sama dengan yang diharapkan dari pilihan sebelumnya. Sebuah opsi uang tunai, tingkat diskonto tingkat bunga bebas risiko yang diasumsikan mewakili pengembalian uang tunai yang tidak akan dibayarkan sampai exercise. Risk-Free Interest Rate di bawah Model Binomial Jika tingkat bebas risiko variabel harus digunakan di bawah Model Binomial di Option123, Entitas AS yang menerbitkan opsi pada sahamnya sendiri harus menggunakan imbal hasil tersirat dari kurva imbal hasil nol kuartalan Treasury AS selama jangka waktu opsi yang diharapkan karena asumsi tingkat bunga bebas risiko jika menggunakan model kisi yang menggabungkan opsi kontrak Istilah Itu, pada setiap node dalam kisi, perusahaan akan menggunakan forward rate mulai dari tanggal simpul, dengan istilah yang sama dengan periode sampai simpul berikutnya Masukan tersebut perlu dimasukkan pada lembar kerja Pohon di O Ption123.Untuk referensi Anda terhadap tingkat bebas risiko, data tingkat bunga Treasury Treasury AS diberikan pada lembar kerja Risk Free Rate. Pembaruan berkala diperlukan dan tersedia di situs web kami jika Anda ingin menggunakan data yang tersedia sebagai tingkat bebas risiko. Jadwal Vesting. Untuk penghargaan yang rasis secara jurang, yaitu sekaligus, biaya akan dikenali secara garis lurus selama periode vesting Jika bagian yang berbeda dari keseluruhan rompi pada tanggal yang berbeda, ini disebut rompi bertingkat. Pilihan dengan vesting bergradasi, perusahaan harus mempertimbangkan untuk memisahkan hibah tersebut menjadi beberapa bagian berdasarkan persyaratan vesting mereka karena dalam beberapa kasus, pilihan yang diharapkan dari masing-masing bagian dapat berbeda secara signifikan. ASC 718 atau FAS 123 R, untuk penghargaan dengan HANYA kondisi Layanan yang memiliki graded vesting schedule, an entity may decide to recognize compensation cost. a on a straight-line basis as if the award was, in-substance, multiple awards or b on a straight-line basis over the requisite service period for the entire award. However, per ASC 718 or FAS 123 R , the amount of compensation cost recognized at any date must at least equal the portion of the grant-date value of the award that is vested at that date. The choice of attribution method is an accounting policy decision that should be applied consistently to all share-based payments subject to graded service vesting However, this choice does not extend to awards that are subject to performance vesting The compensation cost for each vesting tranche in an award subject to performance vesting must be recognized ratably from the service inception date to the vesting date for each tranche. In Option123 , the awards with graded vesting schedules are still recorded as multiple grant items, instead of just on grant item, but you can choose to recognize compensation cost either by a or b. If the first t ranche is vested immediately on the grant date, the above straight-line attribution method can not be applied as it does not meet the requirement of ASC 718 or FAS 123 R , because the amount of compensation cost recognized at the grant date, practically 0 or 0 , does NOT equal the portion of the grant-date value of the award, 25 , that is vested at that date. Accounting and Expense Allocation. Under ASC 718 or FAS 123 R, expense is recognized only for options that ultimately are vested Compensation expense is not recognized for options that are forfeited because grantees fail to fulfill service requirement Therefore, while the fair value per option would not be re measured, the number of options actually vesting may change, and this would require re-measurement of aggregate compensation expense Compensation expense is not reversed for options that expire unexercised, even if the options turn out to be worthless because the stock price declined. In Option123 , the expense allocation calcul ates the aggregate value of the total award and allocates it over the vesting period. Under ASC 718 or FAS 123 R, if options are not ultimately vested, no compensation cost should be recognized all expense recognized previously should be reversed However, Per FAS 123 R , regardless the nature and numbers of conditions that must be satisfied, the existence of a market condition requires recognition of compensation cost if the requisite service is rendered, even if the market condition is never satisfied. Forfeiture Estimation. When recognizing compensation cost under ASC 718, FAS 123 R, or FAS 123, two methods of accounting are allowed for forfeitures related to continuing employment Estimated and Actual An employer could elect to estimate forfeitures or could recognize compensation cost assuming all awards will vest and reverse recognized compensation cost for forfeited awards when the awards are actually forfeited However, FAS 123 R eliminates the latter accounting alternative and requir es that employers estimate forfeitures resulting from the failure to satisfy service or performance conditions when recognizing compensation cost. Those estimates must be evaluated each reporting period and adjusted, if necessary, by recognizing the cumulative effect of the change in estimate on compensation cost recognized in prior periods to adjust the compensation cost recognized to date to the amount that would have been recognized if the new estimate of forfeitures had been used since the grant date. An employer s estimate of forfeitures should be adjusted as actual forfeitures differ from its estimates, resulting in the recognition of compensation cost only for those awards that actually vest. In Option123 , the initial forfeiture is entered on Basic Info worksheet, and the compensation cost then is recognized over the requisite service period, net of initial estimated forfeiture Estimation adjustment and Actual forfeiture cancellation are entered differently in Option123.All adjust ments to initial estimation or prior estimation can be done Exp Sum worksheet All actual forfeiture needs to be entered on Basic Info in order to report actual forfeiture properly. However, you may always enter both estimation adjustment and actual forfeiture cancellation on Basic Info worksheet All forfeitures, including initial estimation, estimation adjustment, and actual forfeiture, are either entered or transferred onto Exp Sum worksheet. When performance targets also exist, companies must make a best estimate of the number of awards expected to be earned based on attainment of the target If the company elects the estimated forfeitures method for continued employment, a further estimate must be made for awards that will be forfeited based on continued employment. Similar to the requirements of ASC 718, FAS 123, or FAS 123 R requires that the income tax effects of share-based payments be recognized for financial reporting purposes only if such awards would result in deductions on the company s income tax return Generally, the amount of income tax benefit recognized in any period is equal to the amount of compensation cost recognized multiplied by the employer s statutory tax rate An offsetting deferred tax asset also is recognized. If the tax deduction reflected on the company s income tax return for an award generally at option exercise or share vesting exceeds the cumulative amount of compensation cost recognized in the financial statements for that award, the excess tax benefit is recognized as an increase to additional paid-in capital. Alternatively, the tax deduction reported in the tax return may be less than the cumulative compensation cost recognized for financial reporting purposes The deferred tax asset in excess of the benefit of the tax deduction needs to be written-off.1 In equity to the extent that additional paid-in capital has been recognized APIC credits for excess tax deductions from previous employee share-based payments accounted for under ASC 718 or FAS 123 regardless of whether or not an entity elected to recognize compensation cost in the financial statements or only in pro forma disclosures or under ASC 718 OR FAS 123 R , and.2 In operations income tax expense , to the extent the write-off exceeds previous excess tax benefits recognized in equity. Option123 tax-effects compensation expense over the vesting period Unlike other programs, this Program has the ability to adjust deferred tax accounts for any tax rate changes that arise during the vesting period Accounting for income taxes related to share-based compensation can be complicated, consulting to your tax advisor may be necessary Tax rates are entered in the Forfeiture Estimate part on Exp Sum worksheet. Presentation and Disclosure. ASC 718 or FAS 123 R s requirement that the compensation cost associated with share-based payments be recognized in the financial statements eliminating the pro forma disclosure alternative is a significant change in accounting for many compa nies that, in some cases, will be recognizing that compensation cost in their financial statements for the first time. ASC 718 or FAS 123 R require entities to provide disclosures with respect to share-based payments to employees and non - employees that satisfy the following objectives. An entity with one or more share-based payment arrangements shall disclose information that enables users of the financial statements to understand. The nature and terms of such arrangements that existed during the period and the potential effects of those arrangements on shareholders. The effect of compensation cost arising from share-based payment arrangements on the income statement. The method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted or offered to grant , during the period. The cash flow effects resulting from share-based payment arrangements. ASC 718 or FAS 123 R indicates the minimum information needed to achieve those objectives and illustrate how the disclosure requirements might be satisfied In some circumstances, an entity may need to disclose information beyond that required by ASC 718 or FAS 123 R to achieve the disclosure objectives. An entity that acquires goods or services other than employee services in share-based payment transactions shall provide disclosures similar to those required by ASC 718 or FAS 123R to the extent that those disclosures are important to an understanding of the effects of those transactions on the financial statements In addition, an entity that has multiple share-based payment arrangements with employees shall disclose information separately for different types of awards under those arrangements to the extent that differences in the characteristics of the awards make separate disclosure important to an understanding of the entity s use of share-based compensation. In Option123 , the following disclosures are provided in both interim and annual report For current fiscal period, the number of shares, weighted average exercise price, weighted remaining contract term, and aggregate intrinsic value for. Those outstanding at the end of the year. Those exercisable or convertible at the end of year. Exercised or converted. Forfeited, and. For current fiscal period, the number and weighted grant-date fair value intrinsic value for. Those non-vested at the beginning of the year. Those non-vested at the end of the year. Those granted. For current fiscal period, the summary information of the following assumptions. Expected volatility. Weighted-average volatility. Expected dividend. Expected term. Risk-free rate. Download a Free Demo with limited functions. For the Last Time Stock Options Are an Expense. The time has come to end the debate on accounting for stock options the controversy has been going on far too long In fact, the rule governing the reporting of executive stock options dates back to 1972, when the Accounting Principles Board, the predecessor to the Financial Accounting S tandards Board FASB , issued APB 25 The rule specified that the cost of options at the grant date should be measured by their intrinsic value the difference between the current fair market value of the stock and the exercise price of the option Under this method, no cost was assigned to options when their exercise price was set at the current market price. The rationale for the rule was fairly simple Because no cash changes hands when the grant is made, issuing a stock option is not an economically significant transaction That s what many thought at the time What s more, little theory or practice was available in 1972 to guide companies in determining the value of such untraded financial instruments. APB 25 was obsolete within a year The publication in 1973 of the Black-Scholes formula triggered a huge boom in markets for publicly traded options, a movement reinforced by the opening, also in 1973, of the Chicago Board Options Exchange It was surely no coincidence that the growth of the t raded options markets was mirrored by an increasing use of share option grants in executive and employee compensation The National Center for Employee Ownership estimates that nearly 10 million employees received stock options in 2000 fewer than 1 million did in 1990 It soon became clear in both theory and practice that options of any kind were worth far more than the intrinsic value defined by APB 25.FASB initiated a review of stock option accounting in 1984 and, after more than a decade of heated controversy, finally issued SFAS 123 in October 1995 It recommended but did not require companies to report the cost of options granted and to determine their fair market value using option-pricing models The new standard was a compromise, reflecting intense lobbying by businesspeople and politicians against mandatory reporting They argued that executive stock options were one of the defining components in America s extraordinary economic renaissance, so any attempt to change the accounting rules for them was an attack on America s hugely successful model for creating new businesses Inevitably, most companies chose to ignore the recommendation that they opposed so vehemently and continued to record only the intrinsic value at grant date, typically zero, of their stock option grants. Subsequently, the extraordinary boom in share prices made critics of option expensing look like spoilsports But since the crash, the debate has returned with a vengeance The spate of corporate accounting scandals in particular has revealed just how unreal a picture of their economic performance many companies have been painting in their financial statements Increasingly, investors and regulators have come to recognize that option-based compensation is a major distorting factor Had AOL Time Warner in 2001, for example, reported employee stock option expenses as recommended by SFAS 123, it would have shown an operating loss of about 1 7 billion rather than the 700 million in operating income it a ctually reported. We believe that the case for expensing options is overwhelming, and in the following pages we examine and dismiss the principal claims put forward by those who continue to oppose it We demonstrate that, contrary to these experts arguments, stock option grants have real cash-flow implications that need to be reported, that the way to quantify those implications is available, that footnote disclosure is not an acceptable substitute for reporting the transaction in the income statement and balance sheet, and that full recognition of option costs need not emasculate the incentives of entrepreneurial ventures We then discuss just how firms might go about reporting the cost of options on their income statements and balance sheets. Fallacy 1 Stock Options Do Not Represent a Real Cost. It is a basic principle of accounting that financial statements should record economically significant transactions No one doubts that traded options meet that criterion billions of dollars worth are bought and sold every day, either in the over-the-counter market or on exchanges For many people, though, company stock option grants are a different story These transactions are not economically significant, the argument goes, because no cash changes hands As former American Express CEO Harvey Golub put it in an August 8, 2002, Wall Street Journal article, stock option grants are never a cost to the company and, therefore, should never be recorded as a cost on the income statement. That position defies economic logic, not to mention common sense, in several respects For a start, transfers of value do not have to involve transfers of cash While a transaction involving a cash receipt or payment is sufficient to generate a recordable transaction, it is not necessary Events such as exchanging stock for assets, signing a lease, providing future pension or vacation benefits for current-period employment, or acquiring materials on credit all trigger accounting transactions because they in volve transfers of value, even though no cash changes hands at the time the transaction occurs. Even if no cash changes hands, issuing stock options to employees incurs a sacrifice of cash, an opportunity cost, which needs to be accounted for If a company were to grant stock, rather than options, to employees, everyone would agree that the company s cost for this transaction would be the cash it otherwise would have received if it had sold the shares at the current market price to investors It is exactly the same with stock options When a company grants options to employees, it forgoes the opportunity to receive cash from underwriters who could take these same options and sell them in a competitive options market to investors Warren Buffett made this point graphically in an April 9, 2002, Washington Post column when he stated Berkshire Hathaway will be happy to receive options in lieu of cash for many of the goods and services that we sell corporate America Granting options to employees rather than selling them to suppliers or investors via underwriters involves an actual loss of cash to the firm. It can, of course, be more reasonably argued that the cash forgone by issuing options to employees, rather than selling them to investors, is offset by the cash the company conserves by paying its employees less cash As two widely respected economists, Burton G Malkiel and William J Baumol, noted in an April 4, 2002, Wall Street Journal article A new, entrepreneurial firm may not be able to provide the cash compensation needed to attract outstanding workers Instead, it can offer stock options But Malkiel and Baumol, unfortunately, do not follow their observation to its logical conclusion For if the cost of stock options is not universally incorporated into the measurement of net income, companies that grant options will underreport compensation costs, and it won t be possible to compare their profitability, productivity, and return-on-capital measures with those of economica lly equivalent companies that have merely structured their compensation system in a different way The following hypothetical illustration shows how that can happen. Imagine two companies, KapCorp and MerBod, competing in exactly the same line of business The two differ only in the structure of their employee compensation packages KapCorp pays its workers 400,000 in total compensation in the form of cash during the year At the beginning of the year, it also issues, through an underwriting, 100,000 worth of options in the capital market, which cannot be exercised for one year, and it requires its employees to use 25 of their compensation to buy the newly issued options The net cash outflow to KapCorp is 300,000 400,000 in compensation expense less 100,000 from the sale of the options. MerBod s approach is only slightly different It pays its workers 300,000 in cash and issues them directly 100,000 worth of options at the start of the year with the same one-year exercise restriction Economic ally, the two positions are identical Each company has paid a total of 400,000 in compensation, each has issued 100,000 worth of options, and for each the net cash outflow totals 300,000 after the cash received from issuing the options is subtracted from the cash spent on compensation Employees at both companies are holding the same 100,000 of options during the year, producing the same motivation, incentive, and retention effects. How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers. In preparing its year-end statements, KapCorp will book compensation expense of 400,000 and will show 100,000 in options on its balance sheet in a shareholder equity account If the cost of stock options issued to employees is not recognized as an expense, however, MerBod will book a compensation expense of only 300,000 and not show any options issued on its balance sheet Assuming otherwise identical revenues and costs, it will lo ok as though MerBod s earnings were 100,000 higher than KapCorp s MerBod will also seem to have a lower equity base than KapCorp, even though the increase in the number of shares outstanding will eventually be the same for both companies if all the options are exercised As a result of the lower compensation expense and lower equity position, MerBod s performance by most analytic measures will appear to be far superior to KapCorp s This distortion is, of course, repeated every year that the two firms choose the different forms of compensation How legitimate is an accounting standard that allows two economically identical transactions to produce radically different numbers. Fallacy 2 The Cost of Employee Stock Options Cannot Be Estimated. Some opponents of option expensing defend their position on practical, not conceptual, grounds Option-pricing models may work, they say, as a guide for valuing publicly traded options But they can t capture the value of employee stock options, which are p rivate contracts between the company and the employee for illiquid instruments that cannot be freely sold, swapped, pledged as collateral, or hedged. It is indeed true that, in general, an instrument s lack of liquidity will reduce its value to the holder But the holder s liquidity loss makes no difference to what it costs the issuer to create the instrument unless the issuer somehow benefits from the lack of liquidity And for stock options, the absence of a liquid market has little effect on their value to the holder The great beauty of option-pricing models is that they are based on the characteristics of the underlying stock That s precisely why they have contributed to the extraordinary growth of options markets over the last 30 years The Black-Scholes price of an option equals the value of a portfolio of stock and cash that is managed dynamically to replicate the payoffs to that option With a completely liquid stock, an otherwise unconstrained investor could entirely hedge an optio n s risk and extract its value by selling short the replicating portfolio of stock and cash In that case, the liquidity discount on the option s value would be minimal And that applies even if there were no market for trading the option directly Therefore, the liquidity or lack thereof of markets in stock options does not, by itself, lead to a discount in the option s value to the holder. Investment banks, commercial banks, and insurance companies have now gone far beyond the basic, 30-year-old Black-Scholes model to develop approaches to pricing all sorts of options Standard ones Exotic ones Options traded through intermediaries, over the counter, and on exchanges Options linked to currency fluctuations Options embedded in complex securities such as convertible debt, preferred stock, or callable debt like mortgages with prepay features or interest rate caps and floors A whole subindustry has developed to help individuals, companies, and money market managers buy and sell these complex securities Current financial technology certainly permits firms to incorporate all the features of employee stock options into a pricing model A few investment banks will even quote prices for executives looking to hedge or sell their stock options prior to vesting, if their company s option plan allows it. Of course, formula-based or underwriters estimates about the cost of employee stock options are less precise than cash payouts or share grants But financial statements should strive to be approximately right in reflecting economic reality rather than precisely wrong Managers routinely rely on estimates for important cost items, such as the depreciation of plant and equipment and provisions against contingent liabilities, such as future environmental cleanups and settlements from product liability suits and other litigation When calculating the costs of employees pensions and other retirement benefits, for instance, managers use actuarial estimates of future interest rates, employee r etention rates, employee retirement dates, the longevity of employees and their spouses, and the escalation of future medical costs Pricing models and extensive experience make it possible to estimate the cost of stock options issued in any given period with a precision comparable to, or greater than, many of these other items that already appear on companies income statements and balance sheets. Not all the objections to using Black-Scholes and other option valuation models are based on difficulties in estimating the cost of options granted For example, John DeLong, in a June 2002 Competitive Enterprise Institute paper entitled The Stock Options Controversy and the New Economy, argued that even if a value were calculated according to a model, the calculation would require adjustment to reflect the value to the employee He is only half right By paying employees with its own stock or options, the company forces them to hold highly non-diversified financial portfolios, a risk further comp ounded by the investment of the employees own human capital in the company as well Since almost all individuals are risk averse, we can expect employees to place substantially less value on their stock option package than other, better-diversified, investors would. Estimates of the magnitude of this employee risk discount or deadweight cost, as it is sometimes called range from 20 to 50 , depending on the volatility of the underlying stock and the degree of diversification of the employee s portfolio The existence of this deadweight cost is sometimes used to justify the apparently huge scale of option-based remuneration handed out to top executives A company seeking, for instance, to reward its CEO with 1 million in options that are worth 1,000 each in the market may perhaps perversely reason that it should issue 2,000 rather than 1,000 options because, from the CEO s perspective, the options are worth only 500 each We would point out that this reasoning validates our earlier point that options are a substitute for cash. But while it might arguably be reasonable to take deadweight cost into account when deciding how much equity-based compensation such as options to include in an executive s pay packet, it is certainly not reasonable to let dead-weight cost influence the way companies record the costs of the packets Financial statements reflect the economic perspective of the company, not the entities including employees with which it transacts When a company sells a product to a customer, for example, it does not have to verify what the product is worth to that individual It counts the expected cash payment in the transaction as its revenue Similarly, when the company purchases a product or service from a supplier, it does not examine whether the price paid was greater or less than the supplier s cost or what the supplier could have received had it sold the product or service elsewhere The company records the purchase price as the cash or cash equivalent it sacrificed to acquire the good or service. Suppose a clothing manufacturer were to build a fitness center for its employees The company would not do so to compete with fitness clubs It would build the center to generate higher revenues from increased productivity and creativity of healthier, happier employees and to reduce costs arising from employee turnover and illness The cost to the company is clearly the cost of building and maintaining the facility, not the value that the individual employees might place on it The cost of the fitness center is recorded as a periodic expense, loosely matched to the expected revenue increase and reductions in employee-related costs. The only reasonable justification we have seen for costing executive options below their market value stems from the observation that many options are forfeited when employees leave, or are exercised too early because of employees risk aversion In these cases, existing shareholders equity is diluted less than it would otherwise be, or not at all, consequently reducing the company s compensation cost While we agree with the basic logic of this argument, the impact of forfeiture and early exercise on theoretical values may be grossly exaggerated See The Real Impact of Forfeiture and Early Exercise at the end of this article. The Real Impact of Forfeiture and Early Exercise. Unlike cash salary, stock options cannot be transferred from the individual granted them to anyone else Nontransferability has two effects that combine to make employee options less valuable than conventional options traded in the market. First, employees forfeit their options if they leave the company before the options have vested Second, employees tend to reduce their risk by exercising vested stock options much earlier than a well-diversified investor would, thereby reducing the potential for a much higher payoff had they held the options to maturity Employees with vested options that are in the money will also exercise them when they quit, si nce most companies require employees to use or lose their options upon departure In both cases, the economic impact on the company of issuing the options is reduced, since the value and relative size of existing shareholders stakes are diluted less than they could have been, or not at all. Recognizing the increasing probability that companies will be required to expense stock options, some opponents are fighting a rearguard action by trying to persuade standard setters to significantly reduce the reported cost of those options, discounting their value from that measured by financial models to reflect the strong likelihood of forfeiture and early exercise Current proposals put forth by these people to FASB and IASB would allow companies to estimate the percentage of options forfeited during the vesting period and reduce the cost of option grants by this amount Also, rather than use the expiration date for the option life in an option-pricing model, the proposals seek to allow companies t o use an expected life for the option to reflect the likelihood of early exercise Using an expected life which companies may estimate at close to the vesting period, say, four years instead of the contractual period of, say, ten years, would significantly reduce the estimated cost of the option. Some adjustment should be made for forfeiture and early exercise But the proposed method significantly overstates the cost reduction since it neglects the circumstances under which options are most likely to be forfeited or exercised early When these circumstances are taken into account, the reduction in employee option costs is likely to be much smaller. First, consider forfeiture Using a flat percentage for forfeitures based on historical or prospective employee turnover is valid only if forfeiture is a random event, like a lottery, independent of the stock price In reality, however, the likelihood of forfeiture is negatively related to the value of the options forfeited and, hence, to the stoc k price itself People are more likely to leave a company and forfeit options when the stock price has declined and the options are worth little But if the firm has done well and the stock price has increased significantly since grant date, the options will have become much more valuable, and employees will be much less likely to leave If employee turnover and forfeiture are more likely when the options are least valuable, then little of the options total cost at grant date is reduced because of the probability of forfeiture. The argument for early exercise is similar It also depends on the future stock price Employees will tend to exercise early if most of their wealth is bound up in the company, they need to diversify, and they have no other way to reduce their risk exposure to the company s stock price Senior executives, however, with the largest option holdings, are unlikely to exercise early and destroy option value when the stock price has risen substantially Often they own unrestr icted stock, which they can sell as a more efficient means to reduce their risk exposure Or they have enough at stake to contract with an investment bank to hedge their option positions without exercising prematurely As with the forfeiture feature, the calculation of an expected option life without regard to the magnitude of the holdings of employees who exercise early, or to their ability to hedge their risk through other means, would significantly underestimate the cost of options granted. Option-pricing models can be modified to incorporate the influence of stock prices and the magnitude of employees option and stock holdings on the probabilities of forfeiture and early exercise See, for example, Mark Rubinstein s Fall 1995 article in the Journal of Derivatives On the Accounting Valuation of Employee Stock Options The actual magnitude of these adjustments needs to be based on specific company data, such as stock price appreciation and distribution of option grants among employees The adjustments, properly assessed, could turn out to be significantly smaller than the proposed calculations apparently endorsed by FASB and IASB would produce Indeed, for some companies, a calculation that ignores forfeiture and early exercise altogether could come closer to the true cost of options than one that entirely ignores the factors that influence employees forfeiture and early exercise decisions. Fallacy 3 Stock Option Costs Are Already Adequately Disclosed. Another argument in defense of the existing approach is that companies already disclose information about the cost of option grants in the footnotes to the financial statements Investors and analysts who wish to adjust income statements for the cost of options, therefore, have the necessary data readily available We find that argument hard to swallow As we have pointed out, it is a fundamental principle of accounting that the income statement and balance sheet should portray a company s underlying economics Relegating an ite m of such major economic significance as employee option grants to the footnotes would systematically distort those reports. But even if we were to accept the principle that footnote disclosure is sufficient, in reality we would find it a poor substitute for recognizing the expense directly on the primary statements For a start, investment analysts, lawyers, and regulators now use electronic databases to calculate profitability ratios based on the numbers in companies audited income statements and balance sheets An analyst following an individual company, or even a small group of companies, could make adjustments for information disclosed in footnotes But that would be difficult and costly to do for a large group of companies that had put different sorts of data in various nonstandard formats into footnotes Clearly, it is much easier to compare companies on a level playing field, where all compensation expenses have been incorporated into the income numbers. What s more, numbers divulged in footnotes can be less reliable than those disclosed in the primary financial statements For one thing, executives and auditors typically review supplementary footnotes last and devote less time to them than they do to the numbers in the primary statements As just one example, the footnote in eBay s FY 2000 annual report reveals a weighted average grant-date fair value of options granted during 1999 of 105 03 for a year in which the weighted average exercise price of shares granted was 64 59 Just how the value of options granted can be 63 more than the value of the underlying stock is not obvious In FY 2000, the same effect was reported a fair value of options granted of 103 79 with an average exercise price of 62 69 Apparently, this error was finally detected, since the FY 2001 report retroactively adjusted the 1999 and 2000 average grant-date fair values to 40 45 and 41 40, respectively We believe executives and auditors will exert greater diligence and care in obtaining reliable estimates of the cost of stock options if these figures are included in companies income statements than they currently do for footnote disclosure. Our colleague William Sahlman in his December 2002 HBR article, Expensing Options Solves Nothing, has expressed concern that the wealth of useful information contained in the footnotes about the stock options granted would be lost if options were expensed But surely recognizing the cost of options in the income statement does not preclude continuing to provide a footnote that explains the underlying distribution of grants and the methodology and parameter inputs used to calculate the cost of the stock options. Some critics of stock option expensing argue, as venture capitalist John Doerr and FedEx CEO Frederick Smith did in an April 5, 2002, New York Times column, that if expensing were required, the impact of options would be counted twice in the earnings per share first as a potential dilution of the earnings, by increasing the shares outst anding, and second as a charge against reported earnings The result would be inaccurate and misleading earnings per share. We have several difficulties with this argument First, option costs only enter into a GAAP-based diluted earnings-per-share calculation when the current market price exceeds the option exercise price Thus, fully diluted EPS numbers still ignore all the costs of options that are nearly in the money or could become in the money if the stock price increased significantly in the near term. Second, relegating the determination of the economic impact of stock option grants solely to an EPS calculation greatly distorts the measurement of reported income, would not be adjusted to reflect the economic impact of option costs These measures are more significant summaries of the change in economic value of a company than the prorated distribution of this income to individual shareholders revealed in the EPS measure This becomes eminently clear when taken to its logical absurdity Suppose companies were to compensate all their suppliers of materials, labor, energy, and purchased services with stock options rather than with cash and avoid all expense recognition in their income statement Their income and their profitability measures would all be so grossly inflated as to be useless for analytic purposes only the EPS number would pick up any economic effect from the option grants. Our biggest objection to this spurious claim, however, is that even a calculation of fully diluted EPS does not fully reflect the economic impact of stock option grants The following hypothetical example illustrates the problems, though for purposes of simplicity we will use grants of shares instead of options The reasoning is exactly the same for both cases. Let s say that each of our two hypothetical companies, KapCorp and MerBod, has 8,000 shares outstanding, no debt, and annual revenue this year of 100,000 KapCorp decides to pay its employees and suppliers 90,000 in cash and has no ot her expenses MerBod, however, compensates its employees and suppliers with 80,000 in cash and 2,000 shares of stock, at an average market price of 5 per share The cost to each company is the same 90,000 But their net income and EPS numbers are very different KapCorp s net income before taxes is 10,000, or 1 25 per share By contrast, MerBod s reported net income which ignores the cost of the equity granted to employees and suppliers is 20,000, and its EPS is 2 00 which takes into account the new shares issued. Of course, the two companies now have different cash balances and numbers of shares outstanding with a claim on them But KapCorp can eliminate that discrepancy by issuing 2,000 shares of stock in the market during the year at an average selling price of 5 per share Now both companies have closing cash balances of 20,000 and 10,000 shares outstanding Under current accounting rules, however, this transaction only exacerbates the gap between the EPS numbers KapCorp s reported income r emains 10,000, since the additional 10,000 value gained from the sale of the shares is not reported in net income, but its EPS denominator has increased from 8,000 to 10,000 Consequently, KapCorp now reports an EPS of 1 00 to MerBod s 2 00, even though their economic positions are identical 10,000 shares outstanding and increased cash balances of 20,000 The people claiming that options expensing creates a double-counting problem are themselves creating a smoke screen to hide the income-distorting effects of stock option grants. The people claiming that options expensing creates a double-counting problem are themselves creating a smoke screen to hide the income-distorting effects of stock option grants. Indeed, if we say that the fully diluted EPS figure is the right way to disclose the impact of share options, then we should immediately change the current accounting rules for situations when companies issue common stock, convertible preferred stock, or convertible bonds to pay for servic es or assets At present, when these transactions occur, the cost is measured by the fair market value of the consideration involved Why should options be treated differently. Fallacy 4 Expensing Stock Options Will Hurt Young Businesses. Opponents of expensing options also claim that doing so will be a hardship for entrepreneurial high-tech firms that do not have the cash to attract and retain the engineers and executives who translate entrepreneurial ideas into profitable, long-term growth. This argument is flawed on a number of levels For a start, the people who claim that option expensing will harm entrepreneurial incentives are often the same people who claim that current disclosure is adequate for communicating the economics of stock option grants The two positions are clearly contradictory If current disclosure is sufficient, then moving the cost from a footnote to the balance sheet and income statement will have no market effect But to argue that proper costing of stock options woul d have a significant adverse impact on companies that make extensive use of them is to admit that the economics of stock options, as currently disclosed in footnotes, are not fully reflected in companies market prices. More seriously, however, the claim simply ignores the fact that a lack of cash need not be a barrier to compensating executives Rather than issuing options directly to employees, companies can always issue them to underwriters and then pay their employees out of the money received for those options Considering that the market systematically puts a higher value on options than employees do, companies are likely to end up with more cash from the sale of externally issued options which carry with them no deadweight costs than they would by granting options to employees in lieu of higher salaries. Even privately held companies that raise funds through angel and venture capital investors can take this approach The same procedures used to place a value on a privately held compan y can be used to estimate the value of its options, enabling external investors to provide cash for options about as readily as they provide cash for stock. That s not to say, of course, that entrepreneurs should never get option grants Venture capital investors will always want employees to be compensated with some stock options in lieu of cash to be assured that the employees have some skin in the game and so are more likely to be honest when they tout their company s prospects to providers of new capital But that does not preclude also raising cash by selling options externally to pay a large part of the cash compensation to employees. We certainly recognize the vitality and wealth that entrepreneurial ventures, particularly those in the high-tech sector, bring to the U S economy A strong case can be made for creating public policies that actively assist these companies in their early stages, or even in their more established stages The nation should definitely consider a regulation t hat makes entrepreneurial, job-creating companies healthier and more competitive by changing something as simple as an accounting journal entry. But we have to question the effectiveness of the current rule, which essentially makes the benefits from a deliberate accounting distortion proportional to companies use of one particular form of employee compensation After all, some entrepreneurial, job-creating companies might benefit from picking other forms of incentive compensation that arguably do a better job of aligning executive and shareholder interests than conventional stock options do Indexed or performance options, for example, ensure that management is not rewarded just for being in the right place at the right time or penalized just for being in the wrong place at the wrong time A strong case can also be made for the superiority of properly designed restricted stock grants and deferred cash payments Yet current accounting standards require that these, and virtually all other com pensation alternatives, be expensed Are companies that choose those alternatives any less deserving of an accounting subsidy than Microsoft, which, having granted 300 million options in 2001 alone, is by far the largest issuer of stock options. A less distorting approach for delivering an accounting subsidy to entrepreneurial ventures would simply be to allow them to defer some percentage of their total employee compensation for some number of years, which could be indefinitely just as companies granting stock options do now That way, companies could get the supposed accounting benefits from not having to report a portion of their compensation costs no matter what form that compensation might take. What Will Expensing Involve. Although the economic arguments in favor of reporting stock option grants on the principal financial statements seem to us to be overwhelming, we do recognize that expensing poses challenges For a start, the benefits accruing to the company from issuing stock option s occur in future periods, in the form of increased cash flows generated by its option motivated and retained employees The fundamental matching principle of accounting requires that the costs of generating those higher revenues be recognized at the same time the revenues are recorded This is why companies match the cost of multiperiod assets such as plant and equipment with the revenues these assets produce over their economic lives. In some cases, the match can be based on estimates of the future cash flows In expensing capitalized software-development costs, for instance, managers match the costs against a predicted pattern of benefits accrued from selling the software In the case of options, however, managers would have to estimate an equivalent pattern of benefits arising from their own decisions and activities That would likely introduce significant measurement error and provide opportunities for managers to bias their estimates We therefore believe that using a standard straight - line amortization formula will reduce measurement error and management bias despite some loss of accuracy The obvious period for the amortization is the useful economic life of the granted option, probably best measured by the vesting period Thus, for an option vesting in four years, 1 48 of the cost of the option would be expensed through the income statement in each month until the option vests This would treat employee option compensation costs the same way the costs of plant and equipment or inventory are treated when they are acquired through equity instruments, such as in an acquisition. In addition to being reported on the income statement, the option grant should also appear on the balance sheet In our opinion, the cost of options issued represents an increase in shareholders equity at the time of grant and should be reported as paid-in capital Some experts argue that stock options are more like contingent liability than equity transactions since their ultimate cost to the compa ny cannot be determined until employees either exercise or forfeit their options This argument, of course, ignores the considerable economic value the company has sacrificed at time of grant What s more, a contingent liability is usually recognized as an expense when it is possible to estimate its value and the liability is likely to be incurred At time of grant, both these conditions are met The value transfer is not just probable it is certain The company has granted employees an equity security that could have been issued to investors and suppliers who would have given cash, goods, and services in return The amount sacrificed can also be estimated, using option-pricing models or independent estimates from investment banks. There has to be, of course, an offsetting entry on the asset side of the balance sheet FASB, in its exposure draft on stock option accounting in 1994, proposed that at time of grant an asset called prepaid compensation expense be recognized, a recommendation we end orse FASB, however, subsequently retracted its proposal in the face of criticism that since employees can quit at any time, treating their deferred compensation as an asset would violate the principle that a company must always have legal control over the assets it reports We feel that FASB capitulated too easily to this argument The firm does have an asset because of the option grant presumably a loyal, motivated employee Even though the firm does not control the asset in a legal sense, it does capture the benefits FASB s concession on this issue subverted substance to form. Finally, there is the issue of whether to allow companies to revise the income number they ve reported after the grants have been issued Some commentators argue that any recorded stock option compensation expense should be reversed if employees forfeit the options by leaving the company before vesting or if their options expire unexercised But if companies were to mark compensation expense downward when employees f orfeit their options, should they not also mark it up when the share price rises, thereby increasing the market value of the options Clearly, this can get complicated, and it comes as no surprise that neither FASB nor IASB recommends any kind of postgrant accounting revisions, since that would open up the question of whether to use mark-to-market accounting for all types of assets and liabilities, not just share options At this time, we don t have strong feelings about whether the benefits from mark-to-market accounting for stock options exceed the costs But we would point out that people who object to estimating the cost of options granted at time of issue should be even less enthusiastic about reestimating their options cost each quarter. We recognize that options are a powerful incentive, and we believe that all companies should consider them in deciding how to attract and retain talent and align the interests of managers and owners But we also believe that failing to record a transa ction that creates such powerful effects is economically indefensible and encourages companies to favor options over alternative compensation methods It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others Companies should choose compensation methods according to their economic benefits not the way they are reported. It is not the proper role of accounting standards to distort executive and employee compensation by subsidizing one form of compensation relative to all others. A version of this article appeared in the March 2003 issue of Harvard Business Review.