Accounting
According to FASB, discuss at what point, and how compensation cost should be measured.
The compensation cost should be measured with the use of an intrinsic value-based method of accounting. Economic agents can also use the fair value-based method to measure the compensation cost, but this method is mostly applicable in cases when changes are incurred in the stocks, rather then throughout the common processes and stages.
Based on the selection of the method to be used, the timings of compensation cost measurement differ. In this instance, in the case of the fair-based value method, the cost is measured at the grant date, whereas in the case of the intrinsic value-based method, the date is set at either the grant date, or a date established by the economic agent. The Financial Accounting Standards Boar explains: "Under the fair value-based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value-based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock" (Website of the FASB).
2. Explain how compensation expense should be measured for the stock option plan in 2009 and later.
Given the context presented, the desirable method of measuring the compensation expenses is that of the fair value-based method. This method is desirable at this stage as it estimates the expenditures from three different angles -- the marketing period, the existence of a seller and the existence of a buyer. Additionally, the greater benefit is that of using the concept of time value of money, which in fact translates the past and future costs into earnings correlated for today. The editors at the Teach Me Finance website explain: "To calculate that price, fair value converts the asset's future earnings into what they are worth in today's dollars, using a formula that discounts the assets' future net cash flows" (Teach Me Finance, 2005).
3. If options are forfeited because an executive resigns before vesting, what is the effect of the forfeiture of the stock options on the financial statements?
The financial statements of an economic agent testify to its operations and validate its resources and its incomes. The financial statements have to be completed in full respect with the situation encountered, as well as the solution implemented. At a generic level, financial statements reflect the organizational reality not only because this is legally required, but also because it is ethical. Was an economic agent to not be transparent and honest in its financial declarations, its reputation -- and as such its business success -- would be severely impacted.
Given this situation then, it is required that any modification in stocks be operated in the financial statements as well. As such, when an executive resigns and forfeits on his stock before vesting, the financial statements will reflect this situation. On the one hand, the stocks would be registered as new equity. On the other hand, they would be presented to the other stakeholders -- already existent ones or new ones -- and these would be able to purchase them. In other words, changes would be operated at the level of capitals and equity.
4. If options are allowed to lapse after vesting, what is the effect on the financial statements?
Firms will often intentionally let their stock options suffer devaluations either because they do not wish to interfere within the market and they maintain their objectivity, either because they have a direct interest. In the first scenario, the underlying process of thought is that the market would correct itself after the vesting has been adequately integrated. In the second scenario however, the most common rationale is that the company desires to repurchase part of its shares in order to reduce its debt to the shareowners.
This change is also revealed within the financial statements, in the sections dedicated to borrowed capitals, where changes would be operated to state the value of the lapsed shares, as well as their volume. The specifics depend however on the reporting style of each firm. BT Plc. uses the following reporting style:
Source: Website of BT Plc., 2008
5. Discuss the current issue surrounding executive compensation.
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