April 10, 2011
According FASB, compensation plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer’s stock. Compensation cost should be 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 fair value based method. Compensation costs are recognized for other types of stock-based compensation plans under Opinion 25, including plans with variable, usually performance-based, features. Some stock-based compensation plans require an employer to pay an employee, either on demand or at a specified date, a cash amount determined by the increase in the employer’s stock price from a specified level. An entity must measure compensation cost for that award in the amount of the changes in the stock price in the periods in which the changes occur. Regarding stock options, fair value is determined using an option-pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. Under the provisions of the statement 123 of the FASB it is a requirement that companies report stock options on the income statement as an expense. The provision was revised in 2005 due to the prior issues dealing with overstated income on financial statement. The method chosen must meet FASB (107) requirements. In order to determine the fair value of the stock some variables must be used to determine the fair value: * Exercise price (call option or put option)
* Expected dividends (amount paid out)
* Expected volatility of the stock (Up and down of stock prices) * Expected term (Years of...