Debatt The Teorier Of Regnskap For Aksjeopsjoner

Alternativ Prissettingsteori. DEFINISJON av alternativprissettingsteori. Enhver modell - eller teoribasert tilnærming for beregning av virkelig verdi av et alternativ. De mest brukte modellene i dag er Black-Scholes-modellen og binomialmodellen. Begge teorier om opsjonsprising har bred marginer for feil fordi deres verdier er avledet fra andre eiendeler, vanligvis prisen på et selskaps vanlige lager Tid spiller også en stor rolle i opsjonsprisingsteori, fordi beregninger involverer tidsperioder på flere år og mer. Markedsførbare alternativer krever ulike verdsettelsesmetoder enn ikke markedsmessige, som de som er gitt til selskapets ansatte. BREAKING DOWN Alternativ Prissettingsteori. Hvordan børsopsjoner bør verdsettes, har blitt en viktig debatt de siste årene fordi amerikanske selskaper nå er pålagt å kostnadsføre kostnaden for ansatteopsjoner på deres Resultatregnskap For mange unge selskaper som handler på børsene i dag, vil denne utgiften være betydelig uansett hva verdsettelsesmetoder er brukt Behovet for konsistent og nøyaktig behandling av denne økende utgiften gir incitament til å skape nye og innovative løsninger på opsjonsprisingsteori. For siste gangs opsjonsalternativer er en kostnad. Tiden er kommet for å avslutte debatten om bokføring av aksjeopsjoner Kontroversen har pågått altfor lenge Faktisk regjeringen for rapportering av aksjeopsjoner dateres tilbake til 1972, da regnskapsprinsippstyret, forgjengeren til Financial Accounting Standards Board FASB, utstedte APB 25 Regelen angav at Kostnaden ved opsjoner på tildelingstidspunktet måles med egenverdi differansen mellom aksjekursens nåværende markedsverdi og oppløsningsprisen på opsjonen. Under denne metoden ble det ikke tildelt noen kostnader til opsjoner når utøvelseskursen ble satt til nåværende markedspris. Begrunnelsen for regelen var ganske enkel Fordi ingen kontanter skifter hender når tilskuddet er gjort, er utstedelse av aksjeopsjon ikke et eco nominelt signifikant transaksjon Det er det mange trodde på tiden. I tillegg var lite teori eller praksis tilgjengelig i 1972 for å veilede selskaper for å bestemme verdien av slike uutviklede finansielle instrumenter. APB 25 var foreldet innen ett år. Publikasjonen i 1973 av den svarte - Scholes formel utløste en stor boom i markeder for børsnoterte opsjoner, en bevegelse forsterket av åpningen, også i 1973, av Chicago Board Options Exchange. Det var absolutt ingen tilfeldighet at veksten i de handlede opsjonsmarkedene ble speilet av økende bruk av aksjeopsjoner i utøvende og ansattes kompensasjon Nasjonalt senter for ansattes eierandel anslår at nesten 10 millioner ansatte fikk aksjeopsjoner i 2000 mindre enn 1 million i 1990 Det ble snart klart i både teori og praksis at opsjoner av noe slag var verdt langt mer enn den iboende verdien som er definert av APB 25. FASB initierte en gjennomgang av opsjonsregnskapet i 1984 og etter mer enn et tiår av oppvarmet kontrovers, endelig utstedt SFAS 123 i oktober 1995 Det anbefales, men krever ikke at selskapene skal rapportere kostnaden for opsjoner som er gitt, og å bestemme sin rettferdige markedsverdi ved hjelp av opsjonsprisemodeller. Den nye standarden var et kompromiss som gjenspeiler intensiv lobbyvirksomhet av forretningsfolk og Politikere mot obligatorisk rapportering De hevdet at konsernvalgene var en av de grunnleggende komponentene i USAs ekstraordinære økonomiske renessanse, så ethvert forsøk på å endre regnskapsregler for dem var et angrep på USAs enormt vellykkede modell for å skape nye virksomheter. Uunngåelig er de fleste selskaper valgte å ignorere anbefalingen om at de motsatte seg så voldsomt og fortsatte å registrere kun egenverdien ved tildelingstidspunktet, typisk null, av deres opsjoner på aksjeopsjoner. Den ekstraordinære bremsen i aksjekursene gjorde at kritikere av opsjonsutgifter ser ut som spoilsports. Men siden Krasj, debatten har returnert med hevn I særdeleshet har skremmende skandaler oppdaget hvor uvirkelig et bilde av deres økonomiske resultater som mange selskaper har malt i sine regnskap. I økende grad har investorer og regulatorer kommet til å erkjenne at opsjonsbasert kompensasjon er en stor forvrengende faktor. Hadde AOL Time Warner i 2001, for eksempel rapporterte ansatteopsjonsutgifter som anbefalt av SFAS 123, ville det ha vist et driftsunderskudd på rundt 1 7 milliarder i stedet for de 700 millioner i driftsinntektene som det faktisk rapporterte. Vi tror at saken for kostnadsutgifter er overveldende, og På de følgende sidene undersøker og avviser vi hovedkravene fremsatt av de som fortsetter å motsette seg det. Vi demonstrerer at i motsetning til disse ekspertene har aksjeopsjoner tilskudd til virkelige kontantstrømmer som må rapporteres, at måten å kvantifisere disse implikasjonene er tilgjengelige, at fotnotens avsløring ikke er en akseptabel erstatning for rapportering av transaksjonen i inkom e erklæring og balanse og at full anerkjennelse av opsjonskostnader ikke trenger å emasculate incentiver av entreprenørskapsvirksomheter. Vi diskuterer da bare hvordan bedrifter kan gå om å rapportere kostnaden av opsjoner på resultatregnskap og balanse. Fallacy 1 aksjeopsjoner representerer ikke en reell kostnad. Det er et grunnleggende prinsipp for regnskap at regnskap skal registrere økonomisk signifikante transaksjoner. Ingen tviler på at handlede alternativer oppfyller dette kriteriet. Milliarder dollar verdier kjøpes og selges hver dag, enten i over-the-counter-markedet eller på utvekslinger For mange er imidlertid aksjeselskapsstipendier en annen historie. Disse transaksjonene er ikke økonomisk signifikante. Argumentet går fordi ingen kontanter skifter hender. Som tidligere amerikanske direktør Harvey Golub satte den i 8. august 2002, Wall Street Journal artikkel, aksjeopsjoner tilskudd er aldri en kostnad for selskapet, og derfor bør aldri bli regnskapsført som en kostnad i resultatregnskapet. på plass tåler økonomisk logikk, for ikke å nevne sunn fornuft, i flere henseender. Til en gang må verdioverføringer ikke innebære overføring av kontanter. Mens en transaksjon som involverer en kvittering eller betaling er tilstrekkelig til å generere en registrerbar transaksjon, er det ikke nødvendige hendelser som utveksling av aksjer for eiendeler, signering av leiekontrakt, tilveiebringelse av fremtidig pensjon eller feriefordeler for inneværende periode ansettelse, eller kjøp av materiale på kreditt alle utløser regnskapstransaksjoner fordi de innebærer overføringer av verdi, selv om ingen kontanter skifter hender på det tidspunktet Transaksjonen skjer. Selv om ingen kontanter skifter hender, utsteder aksjeopsjoner til ansatte en kontantoffering, en mulighetskostnad, som må regnskapsføres. Hvis et selskap skulle gi aksjer, i stedet for opsjoner, til ansatte, ville alle være enige at selskapets kostnader for denne transaksjonen ville være det kontanter det ellers ville ha mottatt dersom det hadde solgt aksjene til dagens markedspris til investor s Det er nøyaktig det samme med aksjeopsjoner Når et selskap gir opsjoner til ansatte, gir det muligheten til å motta kontanter fra forsikringsgivere som kunne ta de samme alternativene og selge dem på et konkurransedyktig marked for opsjoner til investorer Warren Buffett gjorde dette poeng grafisk i en 9. april 2002, Washington Post kolonne da han uttalte Berkshire Hathaway vil være glad for å motta alternativer i stedet for kontanter for mange av de varer og tjenester som vi selger selskapets Amerika Granting alternativer til ansatte i stedet for å selge dem til leverandører eller investorer via garantier involverer et faktisk tap av kontanter til firmaet. Det kan selvsagt være rimeligere hevdet at kontanter som gis ved å utstede opsjoner til ansatte, i stedet for å selge dem til investorer, kompenseres av kontanter som selskapet opprettholder ved å betale sine ansatte mindre penger Som to anerkjente økonomer, Burton G Malkiel og William J Baumol, notert i en 4. april 2002, Wall Street Journal artikkel Et nytt entreprenørfirma kan n ot være i stand til å yte den kontantkompensasjon som er nødvendig for å tiltrekke utestående arbeidstakere. I stedet kan det tilby aksjeopsjoner. Men Malkiel og Baumol, dessverre, følger ikke deres observasjon til sin logiske konklusjon. For om kostnaden for aksjeopsjoner ikke er universelt innlemmet i målingen av nettoinntekt, vil selskaper som gir opsjoner undervurdere kompensasjonskostnadene, og det vil ikke være mulig å sammenligne lønnsomhet, produktivitet og kapitalbasert tiltak med de av ekvivalente selskaper som bare har strukturert deres kompensasjonssystem på en annen måte Den følgende hypotetiske illustrasjonen viser hvordan det kan skje. Imagine to selskaper, KapCorp og MerBod, som konkurrerer i nøyaktig samme bransje. De to er bare forskjellig i strukturen av deres kompensasjonspakker. KapCorp betaler sine arbeidere 400.000 i total kompensasjon i form av Kontanter i løpet av året I begynnelsen av året utsteder det også gjennom en tegning, 100.000 verdier i kapitalmarkedet, som ikke kan utøves i ett år, og det krever at de ansatte bruker 25 av deres kompensasjon for å kjøpe de nyutstedte opsjonene. Nettokapitalutgangen til KapCorp er 300.000.000.000 i kompensasjonskostnad mindre 100.000 fra salg av opsjonene. MerBod s tilnærming er bare litt annerledes. Det betaler sine arbeidere 300.000 i kontanter og gir dem direkte 100.000 verdt av opsjoner i begynnelsen av året med samme ettårig treningsbegrensning. Økonomisk er de to posisjonene identiske. Hvert selskap har betalt totalt 400.000 i kompensasjon, hver har utstedt 100.000 verdier av opsjoner og for hver netto kontantstrøm utgjør 300.000 etter at kontantene mottatt fra utstedelsen av opsjonene trekkes fra kontanter brukt til kompensasjon. Ansatte hos begge selskapene holder det samme 100.000 valgmuligheter i løpet av året, som gir samme motivasjon, incitament og retensjonseffekter. Hvor legitim er en regnskapsstandard som tillater to e konomisk identiske transaksjoner for å produsere radikalt forskjellige tall. Ved utarbeidelse av årsregnskapet vil KapCorp bestille kompensasjonskostnader på 400.000 og vise 100.000 i opsjoner på balansen i egenkapitalkonto. Dersom kostnaden for opsjoner utstedt til ansatte ikke er regnskapsført som en kostnad vil MerBod imidlertid bestille en kompensasjonskostnad på bare 300.000 og ikke vise noen opsjoner som er utstedt i balansen. Forutsatt ellers identiske inntekter og kostnader, vil det se ut som om MerBods inntjening var 100.000 høyere enn KapCorps MerBod vil også synes å ha en lavere egenkapitalbase enn KapCorp, selv om økningen i antall utestående aksjer i hvert fall vil være det samme for begge selskapene dersom alle opsjoner utøves. Som følge av lavere kompensasjonskostnad og lavere egenkapitalposisjon, har MerBods ytelse av de fleste analytiske tiltak ser ut til å være langt bedre enn KapCorp s. Denne forvrengningen er selvfølgelig gjentatt hvert år som th e to firmaer velger ulike former for kompensasjon Hvor legitim er en regnskapsstandard som tillater to økonomisk identiske transaksjoner til å produsere radikalt forskjellige tall. Fallacy 2 Kostnaden for ansattes aksjeopsjoner kan ikke estimeres. Noen motstandere av opsjonsutgifter forsvarer sin stilling på praktisk, ikke konseptuelle grunner Alternativprismodeller kan fungere som en veiledning for verdsettelse av børsnoterte opsjoner, men de kan ikke fange verdien av ansatteopsjoner, som er private kontrakter mellom selskapet og ansatt for illikvide instrumenter som ikke kan være fritt solgt, byttet, pantsatt som sikkerhet eller sikret. Det er sant at en instrumentets mangel på likviditet vil redusere verdien til innehaveren. Men likviditetstapet til innehaveren gjør ingen forskjell på hva det koster utstederen å opprett instrumentet med mindre utstederen på en eller annen måte drar nytte av mangel på likviditet og for aksjeopsjoner har fraværet av et flytende marked liten effekt på deres verdi til innehaveren Den flotte skjønnheten av opsjonsprisemodeller er at de er basert på egenskapene til den underliggende aksjen. Det er nettopp hvorfor de har bidratt til den ekstraordinære veksten av opsjonsmarkedene de siste 30 årene Black-Scholes-prisen av et alternativ er lik verdien av en portefølje av aksjer og kontanter som styres dynamisk for å replikere utbetalingene til det alternativet. Med en helt likvide beholdning kan en ellers ubegrenset investor helt sikre seg en opsjonsrisiko og trekke ut verdien ved å selge kort replikerende portefølje av aksjer og kontanter I så fall vil likviditetsrabatten på opsjonsverdien være minimal og det gjelder selv om det ikke var noe marked for handel med opsjonen direkte. Likviditeten eller mangelen på markeder i aksjeopsjoner utgjør derfor ikke ved i seg selv, føre til en rabatt i opsjonsverdien til innehaveren. Investeringsbanker, kommersielle banker og forsikringsselskaper har nå gått langt utover de grunnleggende, 30-årene R-gamle Black-Scholes-modellen for å utvikle tilnærminger til prising av alle mulige alternativer. Standardeksempler Eksotiske. Alternativer som handles gjennom mellommenn, i disken og på utveksling. Alternativer knyttet til valutasvingninger. Alternativer innebygd i komplekse verdipapirer som konvertibel gjeld, foretrukket lager, eller innkrevbar gjeld som boliglån med forskuddsbetalinger eller rentekapsler og - gulv En hel underindustri har utviklet seg for å hjelpe enkeltpersoner, selskaper og pengemarkedsforvaltere å kjøpe og selge disse komplekse verdipapirene. Nåværende finansiell teknologi tillater absolutt at bedrifter skal inkludere alle funksjonene i ansattes aksjeopsjoner til en prismodell Noen få investeringsbanker vil til og med sitere priser for ledere som ønsker å hekke eller selge sine aksjeopsjoner før opptjening, hvis deres selskaps opsjonsplan tillater det. Selvfølgelig anslår formelbaserte eller garantistyrere om kostnaden for ansattes lager opsjoner er mindre presise enn kontantutbetalinger eller andelstilskudd, men regnskap skal streve etter være omtrent rett i å reflektere økonomisk virkelighet i stedet for nettopp feil Ledere rutinemessig stole på estimater for viktige kostnadsposter, for eksempel avskrivninger på anlegg og utstyr og avsetninger mot ansvarsforpliktelser, som fremtidige miljøopprensninger og bosetninger fra produktansvar og andre rettssaker Når beregning av kostnadene for ansattes pensjon og andre pensjonsytelser, for eksempel bruker ledere aktuarmessige estimater av fremtidige rentesatser, ansettelsesretensjonsrente, ansattes pensjonsdato, lengden på arbeidstakerne og deres ektefeller, og økningen av fremtidige medisinske kostnader Prismodeller og omfattende erfaring gjør det mulig å estimere kostnaden for aksjeopsjoner utstedt i en gitt periode med en presisjon som er sammenlignbar med eller større enn mange av disse andre elementene som allerede vises på selskaps resultatregnskap og balanser. Ikke alle innvendinger mot å bruke Black - Scholes og andre opsjonsvurderingsmodeller er basert på d Effektene ved estimering av kostnaden for opsjoner gitt For eksempel hevdet John DeLong, i et paper fra juni 2002 om konkurransedyktige bedriftsinstitutt som heter The Stock Options Controversy og The New Economy, at selv om en verdi ble beregnet ut fra en modell, ville beregningen kreve justering å reflektere verdien til den ansatte Han er bare halvparten av retten Ved å betale ansatte med egen aksje eller opsjoner tvinger selskapet seg til å holde svært ikke-diversifiserte finansielle porteføljer, en risiko som ytterligere forverres av investeringen av den ansatte egenkapital i Selskapet i tillegg Siden nesten alle enkeltpersoner er risikovillige, kan vi forvente at ansatte skal legge betydelig lavere verdi på deres opsjonspakke enn andre, bedre diversifiserte investorer. Estimerer størrelsen på denne ansattes risikovurderingen eller dødvektskostnaden, da det er ofte kalt fra 20 til 50, avhengig av volatiliteten til den underliggende aksjen og graden av diversifisering av den ansatte s portefølje Eksistensen av denne dødvektskostnaden brukes noen ganger til å rettferdiggjøre den tilsynelatende store omfanget av opsjonsbasert godtgjørelse utdelt til toppledere. Et selskap som for eksempel søker å belønne sin administrerende direktør med 1 million i opsjoner som er verdt 1000 hver i markedet kan kanskje perversielt grunnen til at det skal utstede 2000 i stedet for 1000 opsjoner, fordi konsernets perspektiv er opsjonene verdt bare 500 hver. Vi vil påpeke at denne begrunnelsen validerer vårt tidligere punkt at alternativene er en erstatning for kontanter. Men mens Det kan muligens være rimelig å ta hensyn til dødvektskostnad når man bestemmer hvor mye egenkapitalbasert kompensasjon som opsjoner som skal inkluderes i en executive s-betalingspakke, det er absolutt ikke rimelig å la døde kostnader påvirke måten selskapene registrerer kostnadene ved pakken Regnskapet reflekterer selskapets økonomiske perspektiv, ikke enhetene, inkludert ansatte som det handler om når et selskap selger et produkt til en kunde for eksempel, det trenger ikke å verifisere hva produktet er verdt for den enkelte. Det teller den forventede kontantbetalingen i transaksjonen som sin inntekt. På samme måte når selskapet kjøper et produkt eller en tjeneste fra en leverandør, gjør den det ikke undersøke om prisen som ble betalt var større eller mindre enn leverandørens pris eller hva leverandøren kunne ha mottatt dersom den solgte produktet eller tjenesten andre steder. Selskapet registrerer kjøpesummen som kontanter eller kontantekvivalenter den ofrede for å skaffe seg det gode eller tjenesten . Oppsett av en klærprodusent var å bygge et treningssenter for sine ansatte. Selskapet ville ikke gjøre det for å konkurrere med treningssenter. Det ville bygge senteret for å generere høyere inntekter fra økt produktivitet og kreativitet til sunnere og lykkere ansatte og for å redusere kostnadene som følge av ansattes omsetning og sykdom Kostnaden for selskapet er klart kostnaden for å bygge og vedlikeholde anlegget, ikke verdien av de enkelte ansatte kan legge på seg Kostnaden for treningssenteret er regnskapsført som en periodisk kostnad, løst tilpasset forventet inntektsøkning og reduksjoner i ansattes kostnader. Den eneste fornuftige begrunnelsen vi har sett for å koste utøvende alternativer under markedsverdien stammer fra observasjon at mange opsjoner blir fortapt når ansatte forlater eller blir utøvd for tidlig på grunn av risikoaversjon fra ansatte. I disse tilfellene blir eksisterende aksjeeiere fortynnet mindre enn det ellers ville være, eller slet ikke, og dermed redusere selskapets kompensasjonskostnad. Mens vi enig med den grunnleggende logikken i dette argumentet, kan virkningen av fortabelse og tidlig utøvelse på teoretiske verdier være grovt overdrevet. Se den virkelige effekten av fortabelse og tidlig utøvelse i slutten av denne artikkelen. Virkelige virkninger av fortabelse og tidlig utøvelse. I motsetning til kontanter lønn, aksjeopsjoner kan ikke overføres fra den enkelte tildelt dem til noen andre. Overførbarhet har to effekter som com bine for å gjøre arbeidstakeralternativene mindre verdifulle enn konvensjonelle opsjoner som handles i markedet. Først mister ansatte mulighetene dersom de forlater selskapet før opsjonene har opptjent. For det andre, har ansatte en tendens til å redusere risikoen ved å utøve etablerte aksjeopsjoner mye tidligere enn en godt - diversifisert investor ville dermed redusere potensialet for en mye høyere utbytte hvis de hadde opsjonene til forfall. Medarbeidere med opsatte opsjoner som er i pengene vil også utøve dem når de slutter, siden de fleste bedrifter krever at ansatte skal bruke eller miste alternativene ved avreise I begge tilfeller reduseres den økonomiske effekten på selskapet med å utstede opsjonene, da verdien og relative størrelsen på eksisterende aksjonærers innsatser blir fortynnet mindre enn de kunne ha vært eller slet ikke. Ved å regne med den økende sannsynligheten for at selskapene vil være påkrevd å bekoste aksjeopsjoner, kjemper noen motstandere til en rearguard-handling ved å prøve å overtale standard settere til betydelig rødt Uce den rapporterte kostnaden for disse alternativene, diskontering av verdien fra det som er målt av finansielle modeller for å gjenspeile den sterke sannsynligheten for fortabelse og tidlig utøvelse Nåværende forslag som disse folket legger til FASB og IASB, vil tillate bedrifter å estimere andelen opsjoner som fortabes i løpet av opptjeningsperiode og redusere kostnaden for opsjonsbevilgninger med dette beløpet. I tillegg til å bruke utløpsdatoen for opsjonslivet i en opsjonsprisemodell, søker forslagene å tillate at selskaper bruker et forventet liv for muligheten til å reflektere sannsynligheten for at tidlig utøvelse Ved å bruke et forventet liv som selskapene kan estimere i nærheten av opptjeningsperioden, sier fire år i stedet for kontraktsperioden på ti år, vil det redusere den estimerte kostnaden for opsjonen. Enkelte tilpasninger bør gjøres for fortabelse og tidlig utøvelse Men den foreslåtte metoden overstiger kostnadskostnaden betydelig siden det ignorerer omstendighetene under hvilke opsjoner som er mest sannsynlig å bli fortapt eller utøvet tidlig Når disse omstendighetene blir tatt i betraktning, vil reduksjonen i ansattekostnadskostnadene sannsynligvis bli mye mindre. Først vurderer du forkastning Ved en flatt prosentsats for fortabelser basert på historisk eller potensiell medarbeideromsetning, er omsetning kun gyldig dersom fortabelse er en tilfeldig hendelse, som et lotteri, uavhengig av aksjekursen. I virkeligheten er imidlertid sannsynligheten for fortabelse negativt knyttet til verdien av opsjonene som er fortapt, og dermed til aksjekursen selv. Folk er mer sannsynlig å forlate et selskap og fortabe opsjoner når aksjekursen har gått ned og alternativene er verdt lite. Men hvis firmaet har gjort det bra og aksjekursen har økt betydelig siden tildelingsdagen, vil alternativene bli mye mer verdifulle, og ansatte vil være mye mindre tilbøyelige til å forlate Hvis arbeidstakeromsetning og fortabelse er mer sannsynlig når alternativene er minst verdifulle, reduseres lite av opsjonene totale kostnader ved tildelingsdato fordi Bruk av sannsynligheten for fortabelse. Argumentet for tidlig trening er lik. Det avhenger også av fremtidig aksjekurs. Ansatte vil ha en tendens til å trene tidlig hvis det meste av deres formue er bundet i selskapet, de må diversifisere, og de har ingen andre måte å redusere risikoeksponeringen mot selskapets aksjekurs. Ledende ansatte, med de største opsjonsinvesteringene, vil imidlertid ikke trene tidlig og ødelegge opsjonsverdien når aksjekursen har steget betydelig. Ofte har de ubegrenset aksje, som de kan selge som et mer effektivt middel for å redusere risikoeksponeringen. Eller de har nok på plass for å inngå kontrakt med en investeringsbank for å sikre sine opsjonsstillinger uten å utøve for tidlig. Som med fortapningsfunksjonen, beregnes et forventet opsjonsliv uten hensyn til størrelsen på beholdningene av ansatte som trener tidlig, eller til deres evne til å sikke sin risiko på annen måte, vil vesentlig undervurdere kostnaden for opsjonsstipend ed. Option-prismodeller kan modifiseres for å inkludere innflytelse av aksjekursene og omfanget av ansatte valg og aksjebeholdning på sannsynligheten for fortabelse og tidlig utøvelse Se for eksempel Mark Rubinstein s Fall 1995 artikkel i Journal of Derivatives On Regnskapsverdi av ansatteaksjonsopsjoner Den faktiske størrelsen på disse tilpasningene må baseres på spesifikke bedriftsdata, for eksempel aksjekursvekst og distribusjon av opsjonsbevis blant ansatte. Justeringene som er vurdert riktig, kan vise seg å være betydelig mindre enn den foreslåtte Kalkulasjoner som tilsynelatende godkjennes av FASB og IASB ville faktisk gi for noen selskaper en beregning som ignorerer fortabelser og tidlig utøvelse helt kunne komme nærmere den virkelige kostnaden av alternativer enn en som helt ignorerer de faktorene som påvirker arbeidstakernes fortabelse og tidlige treningsbeslutninger. 3 Aksjekostnadskostnader er allerede tilstrekkelig avslørt. Et annet argument i def Ense av den eksisterende tilnærmingen er at selskapene allerede gir opplysninger om kostnaden for opsjonsbevis i fotnoter til regnskapet. Investorer og analytikere som ønsker å justere resultatregnskapet for kostnaden for opsjoner, har derfor de nødvendige dataene lett tilgjengelige. Vi finner at argument som er vanskelig å svelge Som vi har påpekt, er det et grunnleggende prinsipp for regnskapsføring at resultatregnskapet og balansen skal skildre et selskaps underliggende økonomi. Hvis et element av så stor økonomisk betydning som arbeidstillatelsesstipendier til fotnoten avskrekkes, vil dette systematisk forvride de rapporter. Men selv om vi skulle akseptere prinsippet om at fotnotebeskrivelsen er tilstrekkelig, vil vi i realiteten finne det en dårlig erstatning for å regne ut bekostning direkte på de primære uttalelsene. I begynnelsen bruker investeringsanalytikere, advokater og regulatorer nå elektroniske databaser å beregne lønnsomhetstallene basert på tallene i selskapets reviderte inntektsstatistikk En analytiker som følger et enkelt selskap eller en liten gruppe selskaper kan gjøre justeringer for informasjon som er beskrevet i fotnoter. Men det ville være vanskelig og kostbart å gjøre for en stor gruppe selskaper som hadde satt forskjellige typer data i ulike ikke-standardformater i fotnoter Det er klart mye enklere å sammenligne selskapene på like vilkår, der alle kompensasjonskostnadene er innarbeidet i inntektsnumrene. Hva mer er tallene som er oppgitt i fotnoter, kan være mindre pålitelige enn de som er beskrevet i den primære regnskap For det første vurderer ledere og revisorer vanligvis tilleggsfotnoter sist og bruker mindre tid til dem enn de gjør til tallene i de primære uttalelsene. Som bare et eksempel, viser fotnoten i eBays FY 2000 årsrapport en veid gjennomsnittlig stipend - dagsverdi av opsjoner gitt i 1999 på 105 03 i et år hvor den veide gjennomsnittlige utøvelseskursen på aksjer gitt var 64 59 Bare verdien av tildelte opsjoner kan være 63 mer enn verdien av den underliggende aksjen er ikke åpenbar I FY 2000 ble samme effekt rapportert til virkelig verdi av opsjoner gitt av 103 79 med en gjennomsnittlig utøvelseskurs på 62 69 Tilsynelatende , ble denne feilen endelig oppdaget siden rapporten fra FY 2001 med tilbakevendende tilpasning av gjennomsnittlige tildelingsverdier for 1999 og 2000 til henholdsvis 40 45 og 41 40. Vi tror at ledere og revisorer vil utøve større omhu og omsorg for å oppnå pålitelige estimater av kostnaden av aksjeopsjoner hvis disse tallene er inkludert i selskapsinntekter enn de for øyeblikket gjør for fotnotebeskrivelse. Vår kollega William Sahlman i sin desember 2002 HBR artikkel, Utgifter for utgiftsløsninger løser ingenting, har uttrykt bekymring for at rikdom av nyttig informasjon i fotnoter om Tildelte opsjoner vil gå tapt dersom opsjoner kostnadsføres. Det er imidlertid ikke utelukket at kostnaden for opsjoner i resultatregnskapet utelukker konti nåing for å gi en fotnote som forklarer den underliggende fordelingen av tilskuddene og metodologien og parameterinngangene som brukes til å beregne kostnaden for aksjeopsjoner. Noen kritikere av aksjeopsjonskostnader argumenterer, som venturekapitalist John Doerr og FedEx CEO Frederick Smith gjorde i en april 5, 2002, New York Times-kolonne, at hvis kostnadene skulle kreves, ble virkningen av opsjoner talt to ganger i resultat per aksje først som en potensiell fortynning av inntektene, ved å øke utestående aksjer og andre som en avgift mot rapportert inntjening Resultatet ville være unøyaktig og villedende inntjening per aksje. Vi har flere problemer med dette argumentet. Først anslår opsjonskostnadene bare en GAAP-basert utvannet resultat per aksjeberegning når dagens markedspris overstiger opsjonsutnyttelseskursen. Dermed fullt ut Utvannet EPS-tall ignorerer fortsatt alle kostnadene ved opsjoner som er nesten i pengene eller kan bli i pengene dersom aksjekursen øker betraktelig på kort sikt. For det andre vil det ikke bli justert for å avgjøre fastsettelsen av den økonomiske effekten av aksjeopsjonsstipendene utelukkende til en EPS-beregning, måleverdien av rapporterte inntekter, justeres for å gjenspeile den økonomiske effekten av opsjonskostnadene. Disse tiltakene er mer signifikante sammendrag av Endringen i økonomisk verdi av et selskap enn den proraterte fordeling av denne inntekten til enkelte aksjonærer som ble avslørt i EPS-aksjene. Dette blir tydelig når det tas til sin logiske absurditet. Anta at selskaper skulle kompensere alle sine leverandører av materialer, arbeidskraft, energi og kjøpt tjenester med aksjeopsjoner i stedet for kontanter og unngå all kostnadsregnskap i resultatregnskapet. Inntektene og deres lønnsomhetstiltak vil alle være så grovt oppblåst som å være ubrukelige for analytiske formål, bare EPS-nummeret ville hente noen økonomisk effekt fra opsjonsbonusene. Den største innsigelsen mot denne falske påstanden er imidlertid at selv en beregning av fu lly utvannet EPS reflekterer ikke fullt ut den økonomiske effekten av aksjeopsjoner. Følgende hypotetiske eksempel illustrerer problemene, men for enkelhets skyld skal vi bruke tilskudd av aksjer i stedet for opsjoner. Begrunnelsen er nøyaktig den samme for begge sakene. Det er sagt at hver av våre to hypotetiske selskaper, KapCorp og MerBod, har 8 000 utestående aksjer, ingen gjeld og årlige inntekter i år på 100 000 KapCorp bestemmer seg for å betale sine ansatte og leverandører 90 000 i kontanter og har ingen andre utgifter MerBod kompenserer imidlertid sine ansatte og leverandører med 80.000 i kontanter og 2.000 aksjer i aksjer til en gjennomsnittlig markedspris på 5 per aksje. Kostnaden for hvert selskap er det samme 90.000. Men nettoinntekt og EPS-tall er svært forskjellige. KapCorps nettoinntekt før skatt er 10.000 eller 1 25 per aksje Derimot rapporterte MerBod s nettoinntekter som ignorerer kostnaden for egenkapitalen til ansatte og leverandører er 20.000, og EPS er 2 00 som tar hensyn til t han har utstedt nye aksjer. Selvfølgelig har de to selskapene nå forskjellige kontanter og antall utestående aksjer med et krav på dem. Men KapCorp kan eliminere denne avviken ved å utstede 2.000 aksjer i aksjemarkedet i løpet av året til en gjennomsnittlig salgspris på 5 per aksje Nå har begge selskapene avsluttende kontanter på 20.000 og 10.000 utestående aksjer. I henhold til gjeldende regnskapsregler, øker denne transaksjonen kun gapet mellom EPS-tallene KapCorps rapporterte inntekt forblir 10.000 siden den ytterligere 10.000 verdien oppnådd ved salg av 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-di storting 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 services 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 would 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 re ceived 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 company 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 provid ers 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 that 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 argua bly 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 compensation 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 com panies 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 options 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 t he 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 equip ment 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 company 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 endorse 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 forfeit 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 benefit s 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 transaction 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. Accrual accounting is the financial reporting model used by the majority of profit-oriented companies and by many not-for-profit companies The fact that companies use the same model is important to financial statement users Investors and creditors use financial information to make their resource allocation decisions It s critical that they be able to compare financial information among companies To facilitate these comparisons, financial accounting employs a body of standards known as generally accepted accounting principles set of both broad and specific guidelines that companies should follow when measuring and reporting the information in their financial statements and related notes of-ten abbreviated as GAAP and pronounced gap GAAP are a dynamic set of both broad and specific guidelines that companies should f ollow when measuring and reporting the information in their financial statements and related notes The more important broad principles or standards are discussed in a subsequent section of this chapter and revisited throughout the text in the context of accounting applications for which they provide conceptual support 7 More specific standards, such as how to measure and report a lease transaction, receive more focused attention in subsequent chapters. HISTORICAL PERSPECTIVE AND STANDARDS. Pressures on the accounting profession to establish uniform accounting standards began to surface after the stock market crash of 1929 Some feel that insufficient and misleading financial statement information led to inflated stock prices and that this contributed to the stock market crash and the subsequent depression. The 1933 Securities Act and the 1934 Securities Exchange Act were designed to restore investor confidence The 1933 act sets forth accounting and disclosure requirements for initial offer ings of securities stocks and bonds The 1934 act applies to secondary market transactions and mandates reporting requirements for companies whose securities are publicly traded on either organized stock exchanges or in over-the-counter markets 8 The 1934 act also created the Securities and Exchange Commission SEC responsible for setting accounting and reporting standards for companies whose securities are publicly traded. The Securities and Exchange Commission SEC was created by Congress with the 1934 Securities Exchange Act. In the 1934 act, Congress gave the SEC both the power and responsibility for setting accounting and reporting standards for companies whose securities are publicly traded However, the SEC, a government appointed body, has delegated the primary responsibility for setting accounting standards to the private sector It is important to understand that the SEC delegated only the responsibility, not the authority, to set standards The power still lies with the SEC If the S EC does not agree with a particular standard issued by the private sector, it can force a change in the standard In fact, it has done so in the past. The SEC has the authority to set accounting standards for companies, but has delegated the responsibility to the accounting profession. The SEC does issue its own accounting standards in the form of Financial Reporting Releases FRRs , which regulate what must be reported by companies to the SEC itself These standards usually agree with those previously issued by the private sector To learn more about the SEC, consult its Internet site at 9.Early Standard Setting The first private sector body to assume the task of setting accounting standards was the Committee on Accounting Procedure CAP the first private sector body that was delegated the task of setting accounting standards The CAP was a committee of the American Institute of Accountants AIA national organization of professional public accountants The AIA, which was renamed the American In stitute of Certified Public Accountants AICPA national organization of professional public accountants in 1957, is the national organization of professional public accountants From 1938 to 1959, the CAP issued 51 Accounting Research Bulletins ARBs which dealt with specific accounting and reporting problems No theoretical framework for financial accounting was established This approach of dealing with individual issues without a framework led to stern criticism of the accounting profession. In 1959 the Accounting Principles Board APB the second private sector body delegated the task of setting accounting standards replaced the CAP Members of the APB also belonged to the AICPA The APB operated from 1959 through 1973 and issued 31 Accounting Principles Board Opinions APBOs , various Interpretations, and four Statements The Opinions also dealt with specific accounting and reporting problems Many ARBs and APBOs have not been superseded and still represent authoritative GAAP. The Accounting Pr inciples Board APB followed the CAP. The APB s main effort to establish a theoretical framework for financial accounting and reporting was APB Statement No 4, Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises Unfortunately, the effort was not successful. The APB was composed of members of the accounting profession and was supported by their professional organization Members participated in the activities of the board on a voluntary, part-time basis The APB was criticized by industry and government for its inability to establish an underlying framework for financial accounting and reporting and for its inability to act quickly enough to keep up with financial reporting issues as they developed Perhaps the most important flaw of the APB was a perceived lack of independence Composed almost entirely of public accountants, the board was subject to the criticism that the clients of the represented public accounting firms were exerting self-interes ted pressure on the board and influencing their decisions Other interest groups were underrepresented in the standard-setting process. Current Standard Setting Criticism of the APB led to the creation in 1973 of the Financial Accounting Standards Board FASB the current private sector body that has been delegated the task of setting accounting standards and its supporting structure The FASB differs from its predecessor in many ways There are seven full-time members of the FASB, compared to 18 21 part-time members of the APB While all of the APB members belonged to the AICPA, FASB members represent various constituencies concerned with accounting standards Members have included representatives from the accounting profession, profit-oriented companies, accounting educators, and government The APB was supported financially by the AICPA, while the FASB is supported by its parent organization, the Financial Accounting Foundation FAF responsible for selecting the members of the FASB and its Ad visory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB s activities The FAF is responsible for selecting the members of the FASB and its Advisory Council, ensuring adequate funding of FASB activities, and exercising general oversight of the FASB s activities 10 The FASB is, therefore, an independent, private sector body whose members represent a broad constituency of interest groups 11.The FASB currently sets accounting standards. In 1984, the FASB s Emerging Issues Task Force EITF responsible for providing more timely responses to emerging financial reporting issues was formed to provide more timely responses to emerging financial reporting issues The EITF membership includes 15 individuals from public accounting and private industry, along with a representative from the FASB and an SEC observer The membership of the task force is designed to include individuals who are in a position to be aware of emerging financial reporting issues The task force considers these emerging issues and attempts to reach a consensus on how to account for them If consensus can be reached, generally no FASB action is required The task force disseminates its rulings in the form of EITF Issues These pronouncements are considered part of generally accepted accounting principles. The Emerging Issues Task Force EITF identifies financial reporting issues and attempts to resolve them without involving the FASB. If a consensus can t be reached, FASB involvement may be necessary The EITF plays an important role in the standard-setting process by identifying potential problem areas and then acting as a filter for the FASB This speeds up the standard-setting process and allows the FASB to focus on pervasive long-term problems. One of the FASB s most important activities has been the formulation of a conceptual framework deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting st andards The conceptual framework project, discussed in more depth later in this chapter, deals with theoretical and conceptual issues and provides an underlying structure for current and future accounting and reporting standards The FASB has issued seven Statements of Financial Accounting Concepts SFACs to describe its conceptual framework The board also has issued over 150 specific accounting standards, called Statements of Financial Accounting Standards SFASs , as well as numerous FASB Interpretations and Technical Bulletins 12.In addition to issuing specific accounting standards, the FASB has formulated a conceptual framework to provide an underlying theoretical and conceptual structure for accounting standards. Graphic 1-2 summarizes this discussion on accounting standards The top of the graphic shows the sources of accounting standards in order of authority Congress gave the SEC the responsibility and authority to set accounting standards, specifically for companies whose securitie s are publicly traded The SEC has delegated the task to various private sector bodies currently the FASB while retaining its legislated authority. G RAPHIC 1-2 Accounting Standard Setting. The lower portion of the graphic summarizes the framework for selecting the principles to be used in preparing financial statements in conformity with generally accepted accounting principles The GAAP hierarchy includes the authoritative pronouncements and interpretations of the SEC, CAP, APB, and FASB, as well as AICPA industry guides, bulletins and interpretations The FASB recently decided to categorize these various sources in descending order a through d of authority Previously, this formalization of a hierarchy existed only in the auditing literature 13.Accounting standards and the standard-setting process discussed above relate to standards governing the measurement and reporting of information for profit-oriented organizations In 1984, the Government Accounting Standards Board GASB responsible f or developing accounting standards for governmental units such as states and cities was created to develop accounting standards for governmental units such as states and cities The GASB operates under the oversight of the Financial Accounting Foundation and the Governmental Accounting Standards Advisory Council. THE ESTABLISHMENT OF ACCOUNTING STANDARDS A POLITICAL PROCESS. The setting of accounting and reporting standards often has been characterized as a political process Standards, particularly changes in standards, can have significant differential effects on companies, investors and creditors, and other interest groups A change in an accounting standard or the introduction of a new standard can result in a substantial redistribution of wealth within our economy. The role of the FASB in setting accounting standards is a complex one Sound accounting principles can provide significant guidance in determining the appropriate method to measure and report an economic transaction However, t he FASB must gauge the potential economic consequences of a change in a standard to the various interest groups as well as to society as a whole One obvious desired consequence is that the new standard will provide a better set of information to external users and thus improve the resource allocation process. The FASB must consider potential economic consequences of a change in an accounting standard or the introduction of a new standard. An example of possible adverse economic consequences is the issue of accounting for postretirement employee health care benefits Many corporations guarantee to pay the health care and life insurance costs of their employees after retirement Traditionally, these companies accounted for these benefits as expenses in the period in which they made payments to or on behalf of retired employees In 1989, the FASB proposed that these costs be accounted for by recognizing expenses over the period of employment rather than after retirementpanies feared that the n ew standard would seriously depress their annual income, and as a result, they would be forced to reduce their health care costs for retirees to soften the effect of the new standard A survey of 992 large companies found that during the two years following the adoption of the new standard, 79 of the companies surveyed changed their retiree medical plans Of those, 78 increased retirees share of costs and 1 eliminated all coverage 14 As a specific example, American Telephone and Telegraph Co in 1989 negotiated with its union to pay health care benefits to retirees only up to a maximum fixed amount, as opposed to unlimited medical benefits offered by many companies Of course, AT s decision to limit retiree medical benefits may have been purely a business decision unrelated to the new reporting requirements 15 Or, the new accounting standard may have caused companies like AT Employers Accounting for Postretirement Benefits Other Than Pensions, was issued in 1990.Another example of the effe ct of economic consequences on standard setting is the highly controversial debate surrounding accounting for employee stock options Employees often are given the option to buy shares in the future at a preset price as an integral part of their total compensation package The accounting objective for any form of compensation is to report compensation expense during the period of service for which the compensation is given At issue is the amount of compensation to be recognized as expense for stock options. CARL LANDEGGER If this becomes GAAP generally accepted accounting principles , it will cause pain It will cause evil People will literally lose their health care benefits 16.Historically, options have been measured at their intrinsic value, which is the simple difference between the market price of the shares and the option price at which they can be acquired For instance, an option that permits an employee to buy 60 stock for 42 has an intrinsic value of 18 The problem is that options for which the exercise price equals the market value of the underlying stock at the date of grant which describes most plans have no intrinsic value and thus result in zero compensation when measured this way, even though the fair value of the options can be quite substantial To the FASB and many others, it seems counterintuitive to not record any compensation expense for arrangements that routinely provide a large part of the total compensation of executives. In 1995, after lengthy debate, the FASB bowed to public pressure and consented to encourage, rather than require, companies to expense the fair value of employee stock options Recently, nearly a decade later, the contentious issue resurfaced, and the FASB issued an exposure draft requiring companies to measure options at their fair values and to expense that amount over an appropriate service period This issue is discussed at greater length in Chapter 19.Public pressure sometimes prevails over conceptual merit in the standard-set ting arena. The most recent example of the political process at work in standard setting is the heated debate that occurred on the issue of accounting for business combinations Back in 1996, the FASB added to its agenda a project to consider a possible revision in the practice of allowing two separate and distinct methods of accounting for business combinations, the pooling of interests method and the purchase method A thorough explanation of the differences between these methods is beyond the scope of this text For our discussion here, just note that a key issue in the debate related to goodwill, an intangible asset that arises only in business combinations accounted for using the purchase method Under the then-existing standards, goodwill, like any other intangible asset, was amortized expensed over its estimated useful life thus reducing reported net income for several years following the acquisition It was that negative impact on earnings that motivated many companies involved in a business combination to take whatever steps necessary to structure the transaction as a pooling of interests, thereby avoiding goodwill, its amortization to expense, and the resulting reduction in earnings. As you might guess, when the FASB initially proposed eliminating the pooling method, many companies that were actively engaged in business acquisitions vigorously opposed the elimination of this means of avoiding goodwill To support their opposition these companies argued that if they were required to use purchase accounting, many business combinations important to economic growth would prove unattractive due to the negative impact on earnings caused by goodwill amortization and would not be undertaken. DENNIS POWELL CISCO SYSTEMS, INC VP Clearly the FASB listened and responded to extensive comments from the public and the financial community to make the purchase method of accounting more effective and realistic 17.To satisfy opposition to its proposal, the FASB suggested several modi fications over the years, but it wasn t until the year 2000 that a satisfactory compromise was reached Specifically, under the new accounting standards issued in 2001 18 only the purchase method is acceptable, but to soften the impact, the resulting goodwill is not amortized We discuss goodwill and its measurement in Chapters 10 and 11.The FASB s dilemma is to balance accounting considerations and political considerations resulting from perceived possible adverse economic consequences To help solve this dilemma, the board undertakes a series of elaborate information-gathering steps before issuing a substantive accounting standard involving alternative accounting treatments for an economic transaction These steps include open hearings, deliberations, and requests for written comments from interested parties For example, 467 comment letters were received on the 1989 proposal concerning accounting for postretirement employee health care benefits Graphic 1-3 outlines the FASB s standard-se tting process. The FASB undertakes a series of information-gathering steps before issuing a substantive accounting standard. G RAPHIC 1-3 The FASB s Standard-Setting Process. These steps are the FASB s attempt to acquire consensus as to the preferred method of accounting, as well as to anticipate adverse economic consequences The board s process is similar to that of an elected political representative, a U S congresswoman for example, trying to determine consensus among her constituency before voting on a bill on the floor of the House of Representatives For this reason, accounting standard setting is a political process. OUR GLOBAL MARKETPLACE. Advances in communication and transportation systems continue to expand the marketplace in which companies operate The world economy is more integrated than ever, and many of the larger U S corporations are truly multinational in nature These multinational corporations have their home in the United States but operate and perhaps raise capital in ot her countries For example, Coca-Cola IBM Colgate-Palmolive Gillette and many other companies generate more than 50 of their revenue from foreign sales It is not uncommon for even relatively small companies to transact business in many different countries. Many U S and foreign companies operate and raise capital in more than one country. Of course, many foreign corporations operate in the United States as well In fact, companies such as Columbia Records and Bridgestone Americas Holding are owned by companies that reside in other countries The financial marketplace also has taken on a global dimension, with many companies crossing geographic boundaries to raise capital For example, nearly 500 foreign companies are listed on the New York Stock Exchange and nearly 400 foreign companies are listed on the London Stock Exchange This expanded marketplace requires that company management understand the laws, customs, regulations, and accounting and reporting standards of many different countries. Toward Global Accounting Standards Most industrialized countries have organizations responsible for determining accounting and reporting standards In some countries, the United Kingdom for instance, the responsible organization is a private sector body similar to the FASB in the United States In other countries, such as France, the organization is a governmental body. Accounting standards prescribed by these various groups are not the same Standards differ from country to country for many reasons, including different legal systems, levels of inflation, culture, degrees of sophistication and use of capital markets, and political and economic ties with other countries These differences can cause problems for multinational corporations A company doing business in more than one country may find it difficult to comply with more than one set of accounting standards if there are important differences among the sets It has been argued that different national accounting standards impair the abil ity of companies to raise capital in international markets. In response to this problem, the International Accounting Standards Committee IASC umbrella organization formed to develop global accounting standards was formed in 1973 to develop global accounting standards The IASC in 2001 reorganized itself and created a new standard-setting body called the International Accounting Standards Board IASB objectives are to develop a single set of high-quality, understandable global accounting standards, to promote the use of those standards, and to bring about the convergence of national accounting standards and International Accounting Standards The IASC now acts as an umbrella organization similar to the Financial Accounting Foundation FAF in the United States This new global standard-setting structure is consistent with a recent FASB vision report attempting to identify an optimal standard-setting environment 19 The IASB s objectives are 1 to develop a single set of high quality, understand able global accounting standards, 2 to promote the use of those standards, and 3 to bring about the convergence of national accounting standards and international accounting standards. The International Accounting Standards Board IASB is dedicated to developing a single set of global accounting standards. The IASC issued 41 International Accounting Standards IASs The IASB endorsed these standards when it was formed in 2001 Since then, the IASB has revised many of them and has issued six standards of its own, called International Financial Reporting Standards IFRSs voluntary IASB standards Compliance with these standards is voluntary, since the IASB has no authority to enforce them However, more and more countries are basing their national accounting standards on international accounting standards 20 The International Organisation of Securities Commissions IOSCO approved a resolution permitting its members to use these standards to prepare their financial statements for cross-border offer ings and listings Beginning in 2005, all listed companies in the European Union EU must prepare their consolidated financial statements using IFRS Some 7,000 listed EU companies are affected. International Financial Reporting Standards are gaining support around the globe. In the United States, the move toward convergence of accounting standards began in earnest with the cooperation of the FASB and the IASC on the earnings per share EPS issue In 1994, the FASB and the IASC began working on projects leading toward the issuance of new standards for the computation of EPS The intent of the FASB s project was to issue an EPS standard that would be compatible with the new international standard and, at the same time, simplify U S GAAP Chapter 19 describes this standard. In 2002, the FASB and IASB signed the so-called Norwalk Agreement, formalizing their commitment to convergence of U S GAAP and IFRS Under this agreement, the boards pledged to remove existing differences between their standards and to coordinate their future standard-setting agendas so that major issues are worked on together Recent standards issued by the FASB that you will encounter in our later discussions on share-based compensation, nonmonetary exchanges, and inventory costs are recent examples of this commitment to convergence. The commitment to narrowing differences between U S GAAP and international standards has influenced recent FASB standards. Global Perspectives are included throughout the text to emphasize that our economy does not operate in isolation and to introduce you to some of the differences and similarities in accounting and reporting practices around the world In addition, your instructor may assign end-of-chapter international cases to further explore these differences and similarities. THE ROLE OF THE AUDITOR. Auditors express an opinion on the compliance of financial statements with GAAP. Fed Ex Corporation. It is the responsibility of management to apply accounting standards when communi cating with investors and creditors through financial statements Another group, auditors independent intermediaries who help ensure that management has appropriately applied GAAP in preparing the company s financial statements serves as an independent intermediary to help ensure that management has in fact appropriately applied GAAP in preparing the company s financial statements Auditors examine audit financial statements to express a professional, independent opinion The opinion reflects the auditors assessment of the statements fairness, which is determined by the extent to which they are prepared in compliance with GAAP. The report of the independent auditors for FedEx Corporation s financial statements is in Appendix B The first two paragraphs explain the scope of the audit, and the third states the auditors opinion After conducting its audit, the accounting firm Ernst In our opinion, the financial statements referred to above present fairly, , in conformity with U S generally acce pted accounting principles This is known as a clean opinion If there had been any material departures from GAAP or other problems that caused the auditors to question the fairness of the statements, the report would have been modified to inform readers. The auditor adds credibility to the financial statements, increasing the confidence of capital market participants who rely on the information Auditors, therefore, play an important role in the resource allocation process. Auditors offer credibility to financial statements. In most states, only individuals licensed as certified public accountants CPAs national organization of professional public accountants in the state can represent that the financial statements have been audited in accordance with generally accepted auditing standards Requirements to be licensed as a CPA vary from state to state, but all states specify education, testing, and experience requirements The testing requirement is to pass the Uniform CPA Examination. Certified public accountants CPAs are licensed by states to provide audit services. FINANCIAL REPORTING REFORM. The dramatic collapse of Enron in 2001 and the dismantling of the international public accounting firm of Arthur Andersen in 2002 severely shook U S capital markets The credibility of the accounting profession itself as well as of corporate America was called into question Public outrage over accounting scandals at high-profile companies like WorldCom Xerox Merck Adelphia Communications and others increased the pressure on lawmakers to pass measures that would restore credibility and investor confidence in the financial reporting process. PAUL SARBANES U S SENATOR We confront an increasing crisis of confidence with the public s trust in our markets If this continues, I think it poses a real threat to our economic health 21.Driven by these pressures, Congress acted swiftly and passed the Public Company Accounting Reform and Investor Protection ACT of 2002 commonly referred to as the Sarba nes-Oxley Act for the two congressmen who sponsored the bill The legislation is comprehensive in its inclusion of the key players in the financial reporting process The law provides for the regulation of auditors and the types of services they furnish to clients, increases accountability of corporate executives, addresses conflicts of interest for securities analysts, and provides for stiff criminal penalties for violators Graphic 1-4 outlines the key provisions of the Act. G RAPHIC 1-4 Public Company Accounting Reform and Investor Protection Act of 2002.Key Provisions of the Act. Oversight board The five-member two accountants Public Company Accounting Oversight Board has the authority to establish standards dealing with auditing, quality control, ethics, independence and other activities relating to the preparation of audit reports, or can choose to delegate these responsibilities to the AICPA Prior to the act, the AICPA set auditing standards The SEC has oversight and enforcement auth ority. Corporate executive accountability Corporate executives must personally certify the financial statements and company disclosures with severe financial penalties and the possibility of imprisonment for fraudulent misstatement. Nonaudit services The law makes it unlawful for the auditors of public companies to perform a variety of nonaudit services for audit clients Prohibited services include bookkeeping, internal audit outsourcing, appraisal or valuation services, and various other consulting services Other nonaudit services, including tax services, require pre-approval by the audit committee of the company being audited. Retention of work papers Auditors of public companies must retain all audit or review work papers for five years or face the threat of a prison term for willful violations. Auditor rotation Lead audit partners are required to rotate every five years Mandatory rotation of audit firms came under consideration. Conflicts of interest Audit firms are not allowed to audit public companies whose chief executives worked for the audit firm and participated in that company s audit during the preceding year. Hiring of auditor Audit firms are hired by the audit committee of the board of directors of the company, not by company management. Internal control Section 404 of the act requires that company management document and assess the effectiveness of all internal control processes that could affect financial reporting Company auditors express an opinion on whether management s assessment of the effectiveness of internal control is fairly stated The PCAOB s Auditing Standard No 2 also requires that the company auditors express a second opinion on whether the company has maintained effective internal control over financial reporting. The changes imposed by the legislation are dramatic in scope and pose a significant challenge for the public accounting profession At the same time, many maintain the changes were necessary to lessen the likelihood of corporate and a ccounting fraud and to restore investor confidence in the U S capital markets. WILLIAM J MCDONOUGH PCAOB CHAIRMAN This standard Auditing Standard No 2 is one of the most important and far-reaching auditing standards the board will ever adopt In the past, internal controls were merely considered by auditors now they will have to be tested and examined in detail as quoted in June 18, 2004.Section 404 is perhaps the most controversial provision of the 2002 act No one argues the importance of adequate internal controls However, the costs of implementing this section of the act can be substantial Not only are companies required to document internal controls and assess their adequacy, but their auditors, too, must provide an opinion on management s assessment The Public Company Accounting Oversight Board s PCAOB Auditing Standard No 2 added an additional requirement that auditors express a second opinion on whether the company has maintained effective internal control over financial reporting 22 We revisit Section 404 in Chapter 7 in the context of an introduction to internal controls. ROBERT HERZ FASB CHAIRMAN Under a principles-based approach, one starts with laying out the key objectives of good reporting in the subject area and then provides guidance explaining the objective and relating it to some common examples While rules are sometimes unavoidable, the intent is not to try to provide specific guidance or rules for every possible situation Rather, if in doubt, the reader is directed back to the principles from his presentation to the FEI in 2002.A MOVE AWAY FROM RULES-BASED STANDARDS. The accounting scandals at Enron and other companies also rekindled the debate over principles-based approach to standard setting stresses professional judgment, as opposed to following a list of rules or more recently termed objectives-oriented approach to standard setting stresses professional judgment, as opposed to following a list of rules versus rules-based a list of rules for choo sing the appropriate accounting treatment for a transaction accounting standards In fact, a provision of the Sarbanes-Oxley Act required the SEC to study the issue and provide a report to Congress on its findings That report, issued in July 2003, recommended that accounting standards be developed using an objectives-oriented approach 23 The FASB also issued a proposal addressing this issue 24.A principles-based, or objectives-oriented, approach to standard setting stresses professional judgment, as opposed to following a list of rules. An objectives-oriented approach to standard setting stresses using professional judgment, as opposed to following a list of rules when choosing the appropriate accounting treatment for a transaction Lease accounting provides a useful example for comparing the two approaches In Chapter 15 you will learn that a company records a long-term lease of an asset as either a capital lease or an operating lease If a leasing arrangement is in substance the purchase of an asset with the lease payments effectively serving as payments for that purchase, we should account for the transaction that way A capital lease requires that the property being leased be recorded as an asset and a liability to pay for the asset No asset or liability is recorded for an operating lease Therein lies the problem Because company managers are aware that analysts view debt as indicative of financial risk, those managers often try to avoid reporting more debt than absolutely necessary As a result, firms frequently stretch the limits of the rules to structure lease agreements so that they technically sidestep the FASB s detailed rules, principally four criteria provided in SFAS No 13, for identifying capital leases that require recording a liability. In contrast, the IASB employs an objectives-oriented approach to lease accounting in its IAS 17 In that standard, the focus is on professional judgment rather than specific rules to determine whether the leasing arrangement ef fectively transfers the risk and rewards of ownership Professional judgment is then applied to determine if the risk and rewards have been transferred. Which approach is more likely to capture the economic substance of the lease, rather than its form The FASB s criteria were designed to aid the accountant in determining whether the risk and rewards of ownership have been transferred Many would argue, though, that the result has been the opposite Rather than use the criteria to enhance judgment, management and its accountants can use the rules as an excuse to avoid using professional judgment altogether and instead focus on the rules alone Proponents of an objectives-oriented approach argue that its focus is squarely on professional judgment, there are few rules to sidestep, and we more likely will arrive at an appropriate accounting treatment Detractors, on the other hand, argue that the absence of detailed rules opens the door to even more abuse Even in the absence of intentional misus e, reliance on professional judgment could result in different interpretations for similar transactions, raising concerns about comparability. The FASB is actively considering whether to move toward objectives-oriented standard setting That the IASB primarily follows an objectives-oriented approach, coupled with the FASB s recent moves toward convergence of U S and international standards, hints at a leaning in that direction Opposition, though, is ardent The debate has by no means ended.7 The terms standards and principles sometimes are used interchangeably 8 Reporting requirements for SEC registrants include Form 10-K, the annual report form, and Form 10-Q, the report that must be filed for the first three quarters of each fiscal year 9 In 2000, the SEC issued regulation FD Fair Disclosure which redefined how companies interact with analysts and the public in disclosing material information Prior to regulation FD, companies often disclosed important information to a select group of an alysts before disseminating the information to the general public Now, this type of selective disclosure is prohibited The initial disclosure of market-sensitive information must be made available to the general public 10 The FAF s primary sources of funding are contributions and the sales of the FASB s publications The FAF is governed by trustees, the majority of whom are appointed from the membership of eight sponsoring organizations These organizations represent important constituencies involved with the financial reporting process For example, one of the founding organizations is the Association of Investment Management and Research formerly known as the Financial Analysts Federation which represents financial information users, and another is the Financial Executives International which represents financial information preparers The FAF also raises funds to support the activities of the Government Accounting Standards Board GASB 11 The FASB organization also includes the Financial Accounting Standards Advisory Council FASAC The major responsibility of the FASAC is to advise the FASB on the priorities of its projects, including the suitability of new projects that might be added to its agenda 12 For more information, go to the FASB s Internet site at 13 The hierarchy presented here is based on an Exposure Draft entitled The Hierarchy of Generally Accepted Accounting Principles, Proposed Statement of Financial Accounting Standards, Norwalk, Conn FASB , April 28, 2005 The Standard was expected to be effective for fiscal periods beginning after September 15, 2005 The FASB s Concept Statements are not included in the hierarchy They do not constitute GAAP, but provide a structure for evaluating current standards and for issuing new standards 14 Rod Coddington, USA Snapshots, Hewitt Associates Survey of 992 Large Employers, USA Today November 8, 1991 15 A change in an accounting standard does not directly affect the cash flow of a company For example, changing from th e cash to the accrual method of accounting for postretirement health care benefits does not directly change the amounts and timing of the cash payments the company has to make to retirees However, real cash flow effects could result for a number of reasons As a result of the change in a standard, 1 a company could alter the way it operates, 2 income tax payments could change, or 3 the new standard could cause the violation of a debt agreement thus increasing financing costs 16 Carl Landegger, reprinted in Accounting Today October 23, 1989 , p 1 17 Jonathan Weil, FASB Backs Down on Goodwill-Accounting Rules, The Wall Street Journal December 7, 2000 18 Business Combinations, Statement of Financial Accounting Standards No 141 Norwalk, Conn FASB, 2001 , and Goodwill and Other Intangible Assets, Statement of Financial Accounting Standards No 142 Norwalk, Conn FASB, 2001 19 International Accounting Standard Setting A Vision for the Future Norwalk, Conn FASB, 1998 20 Helen Gernon and Gary Mee k, Accounting An International Perspective New York The McGraw-Hill Companies, 2001 21 James Kuhnhenn, Bush Vows to Punish Corporate Lawbreakers, San Jose Mercury News July 9, 2002 , p 8A 22 An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements, Auditing Standard No 2 Washington, D C PCAOB, 2004 23 Study Pursuant to Section 108 d of the Sarbanes-Oxley Act of 2002 on the Adoption by the United States Financial Reporting System of a Principles-Based Accounting System, Securities and Exchange Commission July 2003 24 Principles-Based Approach to U S Standard Setting, A Financial Accounting Standards Board Proposal Norwalk, Conn FASB, 2002.