Generally Accepted Accounting Principles
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Share-Based Payment
(SFAS No. 123 Revised)

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Summary of SFAS No. 123 (December 2004 Version)

Statement of Financial Accounting Standards (SFAS) No. 123
        a.  Share-Based Payment
        b.  Revised in December 2004

Fair-value-based method is required for public entities
    a.  Cost of share-based payment
              --> required to be recognized in the financial statements.

    b.  All entities
              --> are required to apply a fair-value-based method.

    c.  Nonpublic entities
              --> are allowed to choose intrinsic-value-based method as an alternative.
                
Fair-value-based method
         Stock option
              --> Opting pricing model is used (e.g., Black-Scholes model, binomial model)

Intrinsic-value-based method
         Stock option
              --> Intrinsic value = Quoted market price of stock - Option exercise price

Recognition of Compensation Cost:
    a.  Compensation cost is recognized
             --> over the requisite service period

    b.  Requisite service period
             --> the period in which an employee is required to provide service
             --> vesting period

    c.  Compensation cost is accrued IF
             --> it is probable that the performance condition will be achieved.

    d.  Previously recognized compensation cost is not reversed
             --> if employee share option expires unexercised.
 
 
Changes in December 2004 version of SFAS No. 123

SFAS No. 123 Revised Version (December 2004) supersedes the following:
   
    a.  October 1995 version of SFAS No. 123, Accounting for Stock-Based Compensation
    b.  APB Opinion No. 25, Accounting for Stock Issued to Employees
    c.  SFAS No. 148
    d.  ARB No. 43, Chapter 13B
 
Differences between December 2004 version and October 1995 version of SFAS No. 123:

    a.  Liabilities to employees in share-based payment transactions are measured at:
            --> Public entities; Fair value method is required
            --> Nonpublic entities: Intrinsic value method is allowed

         [October 1995 version]
            --> Fair value based method is encouraged, but not required, for all entities.

    b.  Awards of equity instruments
            --> Nonpublic entities are required to use fair-value-based method

         [October 1995 version]
            --> Nonpublic entities were allowed to use either
                     fair-value-based method
                        or
                     minimum value method

    c.  Number of instruments (for which the requisite service will be rendered):
            --> is required to be estimated for all entities

         [October 1995 version]
            --> All entities were allowed to account for forfeitures as they occur.

    d.  Incremental compensation cost (for a modification of terms and conditions)
            --> measured by comparing the fair values before and after modifications

         [October 1995 version]
            --> The effect of modifications is the difference between
                     the fair value of modified award at the date of grant
                         and
                     the award's value immediately before the modification based on the shorter of
                             (i) its remaining initially estimated expected life or
                             (ii) the expected life of the modified award
 

Summary of SFAS No. 123 (October 1995 Version)

Statement of Financial Accounting Standards (SFAS) No. 123
        a.  Accounting for Stock-Based Compensation
        b.  Issued in October 1995

Fair value based method is encouraged, not required.
    All entities are encouraged (but not required) to adopt fair value based method of accounting for stock-based compensation plan.
 
Transactions with Other Than Employees:
   
    a.  Equity instruments issued in exchange of goods or services
            --> Fair value of goods and services received is used
                  to determine the fair value of equity instruments issued.

    b.  If fair value of equity instruments is more reliably measurable
            --> fair value of equity instruments will be used
            --> common example:  Purchase business combination

Transactions with Employees:

    a.  Fair value based method is encouraged to be used.
    b.  Intrinsic value based method (APB Opinion No. 25) is allowed to be used.
    c.  If intrinsic value based method is used
            --> Pro forma net income (and earnings per share) using fair value based method should be disclosed.
      
Valuation of Equity Instruments (issued for employee services):

 
   a.  Equity instruments issued to employees (in exchange of services from employees)
             --> measured and recognized based on
                   the fair value of equity instruments - amount employees pay

    b.  vested stock --> employees earned the rights to benefit from
    c.  nonvested stock --> employees have not earned the rights to benefit from 

    d.  Fair value of nonvested stock
             --> Market price of a share of the same stock (as if it were vested and issued on the grant date)

    e.  Fair value of a stock option (granted by a public entity)
             --> Opting pricing model is used (e.g., Black-Scholes model, binomial model)

    f.  Following factors are considered
             --> As of grant date: 
                         Exercise price,
                         Expected life of the option,
                         Current price of underlying stock

             --> For the expected life of the option: 
                         Expected volatility of underlying stock,
                         Expected dividends on the stock,
                         Risk-free interest rate
 
    g.  Fair value of a stock option (granted by a nonpublic entity)
             --> Opting pricing model is used (e.g., Black-Scholes model, binomial model)

    h.  Consider all factors (mentioned in Para. 19) except for:
             --> Expected volatility of its stock (over the expected life of the option)
             --> This estimates "Minimum Value" of the option.

Recognition of Compensation Cost:

    a.  Recognized compensation cost is
             --> Based on the number of instruments that vest.

    b.  Vested
             --> When employee's right to receive is not contingent on additional performance
             --> Typically, vested options are exercisable.

 
   c.  Compensation cost is recognized
             --> over the periods (in which related services are rendered)
 








 
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