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FOR IMMEDIATE RELEASELohman Company, PLLC Releases Share Based Compensation Update Stock Option Alert April 28, 2005 -- The Financial Accounting Standards Board has recently issued Statement No. 123 (Revised), Share-Based Payment (Statement 123(R)). This Statement will significantly change the way stock options and other forms of equity awards are accounted for in financial statements. In the past, no expense was recorded for most types of stock options. In the future, virtually all stock options, including those to employees, and other equity awards will result in recording an expense. What is covered by Statement 123(R)? All types of equity awards are covered, including employee stock options, stock purchase plans and stock appreciation rights. The accounting for awards to nonemployees, covered by the original Statement No. 123, is not changed by Statement 123(R). Accounting for employee stock ownership plans (ESOPs) also will not change. Statement 123(R) amends the original Statement No. 123 in several important areas. The most significant change to the standard is to eliminate the use of the “intrinsic value” method available under existing Accounting Principles Board Opinion No. 25 (APB 25). Public companies are now required to record the expense based on the fair value of the award. For a stock option, fair value is determined using a complex mathematical model. Statement 123(R) does not specify a specific model, therefore the Black-Scholes model, which most companies previously used to compute the pro forma expense is acceptable for future calculations. Private companies may no longer ignore volatility as allowed in the minimum value method. However, if a company is unable to determine its own volatility, then it may use an index consisting of similar-type public companies. Statement 123(R) is effective for public entities that are not small business issuers for all existing and new awards in quarters beginning after June 15, 2005, which for calendar year end companies will be their quarter ending September 30, 2005. For unvested awards granted before the effective date, the expense to be recorded as those awards vest is based on the amounts used in the pro forma disclosures in the past. For new awards, the provisions of Statement 123(R) should be followed, which may be very similar to the approach used for a company’s disclosures in the past. There are several ways to adopt Statement 123(R): 1) not make any changes to previously reported amounts and show the effects prospectively, 2) retroactively change the interim statements issued in 2005, or 3) retroactively change all previous financial statements. The amounts shown as a pro forma expense in past financial statements will generally be the amount to record if a company chooses to retroactively change the previous financial statements. Companies need to make this important decision in the coming months. In the meantime, additional disclosures will be necessary about the possible future effects of applying the new Statement. Statement 123(R) is effective for public company small business issuers for all existing and new awards in years beginning after December 15, 2005, which for calendar-year-end companies will be their year beginning January 1, 2006. The other parts of the transition rules are the same for all public companies. Statement 123(R) is effective for private companies for all new awards in years beginning after December 15, 2005. For unvested awards granted before the effective date, a company will continue to follow APB 25 accounting until those awards are no longer outstanding. For new awards, the provisions of Statement 123(R) will be followed. As mentioned previously, the results of applying Statement 123(R) will be different than in the past due to the volatility factor. In the meantime, additional disclosures will be necessary about the possible future effects of applying the new Statement. We are writing at this time to alert you of this development. Companies that have significant stock options may be trying to explain the possible effects on their future financial statements. You should also be aware of the implications Statement 123(R) may have on an entity’s financial statements as they negotiate or advise on the requirements that are to be imposed by a new or proposed contract. In evaluating the implications of Statement 123(R), we hope you agree that this Statement results in greater transparency in financial reporting. However, it is equally important to understand that this Statement has no effect on an entity’s cash flow. We hope you find this information useful to you, your associates and/or your contacts. Please call if you have any questions or if we can help you with any area of concern. For More Information Contact: Lohman Company, PLLC |
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