Hi Ron or JS:
I wonder if you have run into a link explaining SFAS 123 anywhere. I looked on the FASB web site, but I was unable to find one.
Additionally, I am still not 100% clear on how to interpret the results of SFAS 123 (irrespective of whether the estimates are reliable), when I see the results published in the financial notes in the 10ks.
For example, looking at the most recently published 10K for Cisco, ending in fiscal year July 28, 2001, we find the following information in section 39:
The Company is required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to disclose pro forma information regarding option grants made to its employees based on specified valuation techniques that produce estimated compensation charges. These amounts have not been reflected in the Company's Consolidated Statements of Operations because no compensation charge arises when the price of the employees' stock options equals the market value of the underlying stock at the grant date, as in the case of options granted to the Company's employees. Pro forma information under SFAS 123 is as follows (in millions, except per-share amounts):
Then the info goes on to to give us an net income (loss) "as reported" of (1.014 billion), but a pro forma net income (loss) that takes into account SFAS rule 123 of (2.705 billion).
Here are my questions: It looks like to me that fair value of the options is estimated at time of grant using Black Scholes. Well, does the pro forma number above just include options that were granted during that particular fiscal year? My guess is the answer is yes---that it does just include the value of options at grant issued during the fiscal year.
If that is indeed the case, then I assume that the yearly Black Scholes numbers in the 10K are never adjusted or impacted by actual options exercise (or lack of exercise), or by subsequent changes in stock prices. The value is calculated (estimated) once at grant using the Black Scholes model and then is left alone. Is this correct?
Next, when the company finally reports employee stock option as on expense to the IRS on its tax returns, does your research put you in agreement with JS and Goren that the expense companies are reporting is the actual difference between the strike price and exercise price (and therefore has have nothing to do with the expense as estimated with Black Scholes in the 10ks)?. Thanks for your comments on these issues.
Best, Huey |
