-12- B. Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) In 1972, FASB authorized APB 25, which required ESOs to be valued using the “intrinsic value method” (IVM). From 1972 to December 15, 1995, the IVM was the only authorized financial accounting method for valuing ESOs. Under the IVM, the value of ESOs is the excess of the stock’s market price on the grant date over the exercise price. This value is reported directly on the employer’s income statement relating to the year in which the ESOs are granted. ESOs granted at-the-money have no intrinsic value because the stock’s market price on the grant date is equal to the exercise price. C. Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) In October of 1995, FASB issued SFAS 123, which is effective for fiscal years ending after December 15, 1995. SFAS 123 added the “fair value method” (FVM) as the preferred method for valuing ESOs. Pursuant to SFAS 123, companies continuing to use the IVM were required to “make pro forma disclosures of net income and, if presented, earnings per share, as if the * * * [FVM] had been applied.” The value of an ESO is composed of two components: the intrinsic value and the call premium. While the intrinsic value is equal to the stock’s market price on the grant date over thePage: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: May 25, 2011