"FASB Reverses Options-Cost Decision
Straight-line amortization is okay again; board also reaffirms the basis for options classification as equity. Craig Schneider, CFO.com, August 20, 2004
Spurred by criticism for corporate executives and public accountants, the Financial Accounting Standards Board (FASB) on Wednesday decided to change its guidance on how companies should attribute the cost for employee stock option awards with graded vesting. After it had eliminated a straight-line-amortization option, the board reversed course and chose to include it."
<snip>
Complete article at cfo.com
!!!!!
Consider an option grant where 25% of the total options vest one year after the grant date, and another 25% vest each anniversary thereafter. With straight-line-amortization, 25% of the total compensation cost is recognized each year.
With "front-loaded" amortization (I'm not sure of the proper name), each 25% of the options is treated separately. The first 25% is amortized over the first year, the second 25% over two years, the third 25% over three years, and the last 25% over 4 years. Thus, the compensation cost is attributed as follows:
Year 1: ( 1/4 ) * ( 1 + 1/2 + 1/3 + 1/4 ) = 25/48 = 52.1%
Year 2: ( 1/4 ) * ( 1/2 + 1/3 + 1/4 ) = 13/48 = 27.1%
Year 3: ( 1/4 ) * ( 1/3 + 1/4 ) = 7/48 = 14.6%
Year 4: ( 1/4 ) * ( 1/4 ) = 3/48 = 6.3%
However, if a company *annually* grants options -- with the same total value and the same vesting schedule -- the amortization method chosen makes no difference. After the 3rd year for either method, the total annual cost would be 100% of the value of the grants for any one year.
Ron |
