HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION in Visual Studio .NET

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391 HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION
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The nature and types of stock-based compensation plans and awards have constantly changed over the years However, the two most signi cant problems in determining the appropriate accounting for such awards have remained the same: 1 Measurement of compensation cost (ie, the determination of total compensation cost to be allocated to expense for nancial reporting purposes)
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391 HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION
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2 Allocation of compensation cost (ie, the determination of the period(s) over which total compensation cost should be allocated to expense and the method of allocation) To be sure, employees are compensated by being awarded stock options when they contribute services However, their employers do not incur any cost in compensating them that way, any more than they do in issuing previously unissued shares of their stock when they receive money from new stockholders The preexisting stockholders are the ones who incur a cost when employees are awarded stock options, rst a cost of contingent dilution of their ownership interest and later a cost of actual dilution of their ownership interest A reporting entity should report the costs it incurs, not costs other entities incur Ironically, after centering its consideration of reporting in connection with the awarding of employee stock options on the concept of compensation cost, the Financial Accounting Standards Board (FASB) implicitly agreed that the employers incur no cost when compensating the employees when awarding the options, though they do incur a cost in using up the services provided by the employees for which they are awarded options: issuances of equity instruments result in the receipt of services, which give rise to expenses as they are used in an entity s operations 1 Compensation cost is therefore a misnomer, and attempting to determine the amount and timing of such a nonexistent cost diverts attention away from determining the amount and timing of the cost of using up the services received from the employees The American Institute of Certi ed Public Accountants (AICPA) Accounting Standards Division made that point to the FASB when the FASB was considering the issue The FASB explicitly ignored that advice when it issued its Invitation to Comment: It stated that AcSEC s analysis is beyond the scope of this project 2 The authoritative accounting literature addresses the accounting for stock-based compensation in two pronouncements which are as follows: 1 APB Opinion No 25, Accounting for Stock Issued to Employees (AICPA, 1972) Also see Interpretation of APB Opinion No 25, Accounting for Stock Issued to Employees (AICPA, 1973) 2 Statement of Financial Accounting Standard No 123, Accounting for Stock-Based Compensation (FASB, 1995) The APB Opinion No 25 is applicable to all stock option, purchase, award, and bonus rights granted by an employer corporation to an individual employee The Opinion contains substantial guidance in the application of its provisions to such plans Subsequent to the issuance of APB Opinion No 25, the trend toward the adoption by enterprises of more complex plans and awards continued Of particular signi cance was the increase in the number of combination plans plans that provide for the granting of two or more types of awards to individual employees In many combination plans, the employee, or the enterprise, must make an election from alternative awards as to the award to be exercised, thereby canceling the other awards granted under the plan Following the issuance of APB Opinion No 25, there was also a signi cant increase in the number of plans that provided for the granting of variable awards to employees A variable award is one that at the date the grant is awarded, either (1) the number of shares of stock (or the amount of cash) an employee is entitled to receive, (2) the amount an employee is required to pay to exercise his rights with respect to the award, or (3) both the number of shares an employee is entitled to receive and the amount an employee is required to pay, are unknown One of the most popular variable awards is the stock appreciation right (SAR) The SARs are rights granted that entitle an employee to receive, at a speci ed future date(s), the excess of the market value of a speci ed number of shares of the granting employer s capital stock over a stated price The form of payment for amounts earned under an award of SARs may be speci ed by the award (ie, stock,
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FASB, Statement of Standards No 123, Accounting for Stock-Based Compensation, par 89 Id, Invitation to Comment, Accounting for Compensation Plans Involving Certain Rights Granted to Employees, May 31, 1984, par 155
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