Penn State University Smeal College of Business
Smeal PSU
Student Exchange Smeal site map Contact us Accounting faculty directory

Steven Huddart picture
 
Should I exercise my stock options?
 
 
Research
 
Case Studies
 
Courses
 
 
Stock compensation glossary
 
Compensation links
 
Securities law links
 
Tax links
 
 
Office hours and location
 
Facts about the school
 
Home | Previous | Next | Huddart Site Map

Statement of Financial Accounting Standards No. 123


Accounting for Stock-Based Compensation

Issued by the Financial Accounting Standards Board in October 1995 and effective for fiscal years that begin after December 15, 1995, this standard, combined with APB Opinion No. 25 prescribes the financial reporting for stock-based compensation in the United States.

SFAS No. 123 provides guidance for estimating the Fair value of stock-based employee compensation plans. It applies to transactions in which a company issues equity instruments or increases its liabilities by issuing its equity securities as compensation for goods or services. In general, the fair value of the securities issued should be used to measure the value of the services and products received. Stock-based compensation to employees may be measured at Intrinsic value, prescribed by APB Opinion No. 25 and defined as the excess, if any, of the market price of the instrument on the date of grant over the Exercise price (or strike price).

Generally, restricted stock is measured at the market price of unrestricted stock if such stock is publicly-traded. Otherwise, restricted stock is measured at an estimate of this price. The fair value of an option (or its equivalent) on the stock of a publicly-traded company is estimated using an option pricing model, e.g., the Black-Scholes model or a Binomial model. The fair value of an option on a stock that is not publicly-traded is also estimated using an option model, but the valuation need not consider the expected Volatility of the stock's price. (Effectively, this valuation process assumes that the volatility is zero.) Assuming a volatility of zero yields an amount commonly called the Minimum value. The fair value of option compensation is recorded initially as an asset. This asset is expensed ratably over the service period, which is generally the period over which the options Vest.

SFAS No. 123 does not apply to stocks granted to employees under a qualified employee stock purchase plan.

The fair value of stocks given to employees is recognized as a compensation cost to the amount vested at the grant date.

Additional items to be disclosed:

  • the number and weighted-average exercise prices of options broken down as follows: those outstanding at the beginning of the year, those outstanding at the end of the year, those that may be exercised at the end of the year, and those granted, exercised, forfeited, or expired during the year,

  • the weighted-average grant-date fair value of options granted during the year,

  • the number and weighted-average grant-date fair value of equity instruments other than options granted during the year,

  • a description of the method and significant assumptions used during the year to estimate the fair value of options, including the following weighted-average information: risk-free interest rate, expected life, expected volatility, and expected dividends,

  • total compensation cost recognized in the period,

  • Terms of significant modifications of outstanding awards, and

  • for options outstanding at the latest year-end date, the range of exercise prices and the weighted average remaining contractual life.

Additionally, entities that continue to apply APB Opinion 25 to determine the value of options and their equivalents granted to employees shall also disclose pro forma net income earnings per share as if the fair value based accounting method had been used.

Taxation

The timing and amounts of option compensation deducted by the employer corporation for income tax purposes may differ from the amount expensed under SFAS No. 123. For non-qualified options, the employer corporation may deduct from taxable income the difference between the market price of the stock on the date of exercise and the strike price in the year of exercise. A like amount of income is realized by the employee in the year of exercise.


Steven Huddart
Smeal College of Business, Penn State University, University Park, PA 16802-3603 USA
(814) 865-0041
(814) 863-8393 fax
huddart@psu.edu
vCard
Home | Previous | Next | Huddart Site Map

http://www.personal.psu.edu/sjh11/OptionGlossary/SFASNo123long.shtml
was last updated on Tue, Nov 27, 2012.
Today is Mon, Oct 20, 2014.

Unless otherwise noted, all material is:
Copyright ©1995-2012 Steven Huddart. All rights reserved.