As part of its due process, the Financial Accounting Standards Board (FASB) gath
As part of its due process, the Financial Accounting Standards Board (FASB) gathers feedback on its
proposed standards. In many cases the organizations or persons responding provide useful information
because they provide a viewpoint the FASB has not fully considered or else provide technical information
about a particular industry or practice the FASB has failed to consider. In this assignment, you will learn some basic background about what an employee stock option is, how it
works. With that background information you are going to evaluate the arguments raised by the CFO of
Micron Technology in his letter providing feedback to the FASB on the proposed standard on share-based
payments that later was finalized as SFAS 123R, Share-Based Payments. SFAS 123R, later codified as
ASC 718, requires companies to recognize expenses using the fair value of the stock options granted to
executives and employees.
Required:
Read the first three pages of the of the article “How do employee stock options work,” by Samuel Deane
of Morningstar. Then read the comment letter from Micorn’s CFO. Write a memo using the format in
the Memo Guidelines to address the following three questions: 1. Briefly describe what an employee stock option is and how it works? Why might an employer want
to use employee stock options, vs other forms of compensation? Why might employees want
employee stock options, vs other forms of compensation?
2. The first two logical arguments raised by Micron by the main points of their memo are: a. Employee stock options granted at market price do not constitute an “expense” under present
accounting definitions, do not represent an economic cost to the issuer and should not be
recognized as a compensation expense of the issuing company.
b. The measurement methodologies and tools recommended by FASB rely significantly on
management judgments and estimates and will lead to a lack of consistency and
comparability among reported results. Do the principles in the FASB’s conceptual framework lead you to agree or disagree with each of
these two arguments raised by Micron? Discuss each argument separately, identify relevant aspects
of the conceptual framework that you believe are relevant to the arguments being made by Micron.
Be sure to explain why the conceptual framework supports or contradicts the arguments being made
by Micron.
3. Based on your general understanding of the FASB’s conceptual framework and the debate over
expensing stock-based compensation, would you support or oppose to FASB’s requirement of
recognizing stock-based compensation expense measured using fair value? Explain your answer and
provide justification for your views. Be sure to draw from the various aspects of the conceptual
framework. There is not necessarily right or wrong answer to each question. Express your opinion and back them up
with facts and reasoning, particularly reasoning based on the conceptual framework. Do some research
online. You can use all available literature as reference, including those listed below. Be sure to cite any
sources that you use to develop insights or provide direct quotes from (e.g., sections of the codification,
articles).
Your memo should be no more than four pages. You should use 12-point Times New Roman font, oneinch margin on all sides, double spacing in the main text and single spacing in the header.