Response to the FASB's Exposure Draft on Share-Based Payment: An Amendment of FASB Statements No. 123 and No. 95

The Financial Accounting Standards Committee of the American Accounting Association (the Committee) is charged with responding to requests for comment from standard setters on issues related to financial reporting. This paper summarizes the Committee's response to the FASB's March 2004 Exposure Draft, "Share-Based Payment: An Amendment of FASB Statements No. 123 and No. 95" (hereafter, the ED). The comments reflect the views of the individuals on the Committee and not those of the American Accounting Association. The ED addresses accounting and disclosure requirements for share-based payments made in connection with employee services. The ED maintains that the cost of employee services received in exchange for share-based payments should be recognized as an expense to the extent the services are consumed. Because the value of the services consumed cannot be measured directly, the expense is established based on the fair value of the share-based awards granted (adjusted for forfeitures). The Committee strongly endorses the conclusion that share-based payments lead to compensation expense. Research demonstrates that the fair value of stock options can be reliably measured using option-pricing methodologies. The Committee agrees that the FASB should not specify a single option-pricing methodology, and agrees that cash-settled options are liability awards that should be remeasured at fair value at the end of each reporting period.