Psak 53-rev
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Accounting of Stock based compensation
SFAS No. 53
CONTENTS Paragraph INTRODUCTION Objective Scope Definitions
01 - 06 01 - 02 03 - 05 06
COMPENSATION TRANSACTIONS FOR NON-EMPLOYEES
07 - 09
COMPENSATION TRANSACTIONS FOR EMPLOYEES
10 - 51
Basis of Measurement Objective and Date of Measurement Determination of the Fair Value Method of Measurement Compensation made through the issuance of an equity instrument Non-vested stock Restricted Stock Stock option of a Public Company Difficulties in Estimating Employee Stock Purchase Plans Compensation made through cash payments Recognition of compensation Expenses Additional Program and a Change in the on-going program Completion of the Compensation Program DISCLOSURES
10 - 11 12 - 14 15 - 16 17 - 27 17 - 25 17 18 - 19 20 - 34 25 - 27 28 - 30 31 - 33 34 - 42 43 - 45 46 - 51 52 - 56
TRANSITION PERIOD
57
EFFECTIVE DATE
58
Attachment
Paragraphs printed in bold letters are standard paragraphs, which must be read in the context of the explanatory paragraphs and implementation guidance printed in normal
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letters. There is no requirement to apply this statement on items considered to be immaterial. INTRODUCTION 01.
The objective of this statement is to regulate the accounting treatment of stock based compensation.
02.
The term “compensation” used in this statement covers all remuneration provided by a company to the suppliers of goods and services. Suppliers include employees and nonemployees. In a transaction for the procurement of goods and services, a company can adopt a method of making compensation by issuing an equity instrument or by recognizing a liability, the amount of which is determined based on the price of a stock or an equity instrument of the company. To attract employees of high quality, the company can design a compensation program, under which an equity instrument will be granted to the employees. Similarly, the same method can be used to develop business partnership with the suppliers and business counterparts.
Scope 03.
This statement is applicable to all transactions for the procurement of goods or services by a company with a remuneration or compensation in the form of an equity instrument or a liability, the amount of which is determined based on the price of an equity instrument.
04.
This statement must be applied on all compensation transactions provided by the company to the employees in the form of equity instrument such as shares and shares option. The compensation can also be provided in the form of a recognition of a liability by the company as the employer to the employees, the amount of which is determined based on the price of an equity instrument.
05.
This statement shall also be applied on all transactions for the procurement of goods or services by the company from non-employee suppliers with remuneration or compensation in the form of an equity instrument.
Definitions 06.
Followings are definitions of terms used in this statement :
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Fixed award is an employees’ stock based compensation program, which requires, that in order to be able to obtain a right of compensation, an employee must have served the company continuously for a certain period of time. In determining the right on the compensation, employee’s performance is not considered. Intrinsic value is the excess difference between the market price of a stock and the option price of the stock at the time of execution. For example, if the execution price of an option is Rp 20,000,-, while the market price of the underlying stock is Rp 25,000,-, the intrinsic value of the stock option is Rp 5,000,- (namely Rp 25,000,- Rp 20,000,-). Minimum value is the value of the option calculated using the option-pricing model without contemplating the expected price fluctuation of the underlying stock. Fair value is an amount that can be used as a base for an exchange of asset or a settlement of a liability between knowledgeable parties who are willing to conduct an arm’s length transaction. Public company is a company with a legal form of a “perseroan terbatas” (limited liability company - PT), which shares are already owned by at least 300 (three hundred) shareholders and with a paid-in capital of at least Rp 3,000,000,000,(three billion rupiah) or a number of shareholders and amount of paid-in capital stipulated by government regulation. Non-public company is a company other than a public company or a company that does not meet the criteria of a public company. Service period is a period during which an employee provided services to the company that gives him a right on a stock based compensation. Non-vested stock is a stock that cannot be sold to another party, since the employee who obtained the stock has not satisfied the requirements for a compensation entitlement. Restricted stocks are a number of stocks, the sales of which are restricted during a certain period due to an agreement or government regulation, although the employee has fulfilled all of the requirements to own the stock. Tandem award is a compensation program with two (or more) components where, if one of the components is executed, the other components will become void accordingly. Grant date is the date the company and the employee reach an agreement on the terms and conditions of a stock based compensation program. On the date the compensation is granted, the company has a conditional obligation to issue the equity instrument or to transfer asset to an employee having satisfied the terms of a compensation entitlement.
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Vested with compensation is to obtain a right on the benefit of a compensation program. An employee stock based compensation program is considered vested with the employee at the time the employee’s right is no longer dependent on the services of the employee or on the fulfillment of performance requirements to receive or retain stock or cash from the compensation program. Volatility is a measurement of the changes in the price of a stock which have occurred during a certain period (historical volatility) or a measurement of changes in the price of a stock which are expected to occur during a certain period (expected volatility) (The volatility of a stock represents the standard deviation of a continuous compounded rate of return from a stock for a certain period). NON -EMPLOYEE COMPENSATION TRANSACTIONS 07.
If a company issues an equity instrument as a compensation for the procurement of goods or services from a non-employee party, the transaction of compensation shall be treated based on the fair value of the goods/services or the fair value of the equity instrument issued, whichever is more reliably measured.
08.
The fair values of goods or services procured from non-employee suppliers are generally reliably measured and therefore can be used as an indicator of the fair value of the equity instrument issued. The fair value of the equity instrument issued must be used as a base for the measurement of the compensation transaction, if such value is more reliably measured compared to the fair value of goods or services procured. As an example, in a business combination transaction treated using the purchase method, the fair value of the tradable - equity instrument issued is used as a basis of measurement, since the value of the equity instrument issued is more reliably measured compared to the value of net assets of the company acquired.
09.
If the fair value of goods or services procured is not reliably measured, the transaction for the procurement of goods or services from non-employee party must be measured using the fair value of the equity instrument issued at the time the compensation agreement is legally binding.
TRANSACTION OF A COMPENSATION FOR EMPLOYEES Basis of Measurement 10.
Generally, part or the whole remuneration in the form of equity instrument granted to an employee is a compensation for the services of the employee, either for past or future services.
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11.
An equity instrument granted to an employee as a remuneration and compensation of employee’s services shall be measured and recognized at the fair value of the related equity instrument. The part of the fair value of the equity instrument that can be accounted for as employee’s services is the net amount, namely the fair value after deducting the amount that should be paid by the employee at the time the equity instrument is granted.
12.
Any equity instrument granted or transferred directly to the employee by the shareholders shall be treated as a stock-based compensation. Therefore, such transaction shall be treated in accordance with this statement, unless the transfer is intended clearly for other than compensation purposes. The substance of the transaction of the transfer of the equity instrument by the shareholders to the employees is a contribution of capital by the shareholders to the company and a grant of an equity instrument by the company to the employee. However, it is also possible that the direct transfer of an equity instrument from the shareholders to the employees is not a compensation transaction. As an example, the company directly transfers an equity instrument to settle a liability of the shareholders, which is not related to employment whatsoever.
Objective and Date of Measurement 13.
The objective of the measurement is to estimate the fair value of the equity instrument based on the price of the stock on the date the compensation is granted, which will be vested with the employees, after they have provided the required services and fulfilled the other requirements to obtain the right on the benefit of the instrument (for example to exercise a stock option or to sell a stock).
14.
Any prevailing restriction after the right on the benefit of the instrument is vested with the employees, such as not being allowed to transfer the option right to a third party, will affect the value of the instrument, and accordingly must be considered in the fair value of the instrument. However, a restriction caused by the non-validity of the instrument, the right on which is not vested yet with the employees, such as the inability to exercise an option without a right or to sell a stock without a right, will not affect the value of the instrument on the date the right on compensation is granted and accordingly its effect shall not be considered in the determination of the fair value of the instrument. Conversely, the value of an instrument, the right on which is already vested with the employee, shall not be recognized, if the employee fails to fulfill the requirements with respect to his services or performance.
Determination of the fair value 15.
The fair value shall be determined as follows : a. The fair value shall be determined based on the market price of an active market. b. If it is not possible to obtain such market price, the fair value shall be determined through an estimate based on the price of the same type of asset.
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c. If such estimate is not possible to obtain, the fair value shall be determined based on a valuation method appropriate to the conditions. 16.
Examples of the method for the determination of the fair value are discounted cash flow, option pricing models, matrix pricing, option-adjusted spread models and fundamental analysis.
Method of measurement Compensation made through the issuance of equity instrument. Non-vested stock 17.
The fair value of a non-vested stock granted to the employees shall be measured at the market price of the stock (or the estimated market price if the stock is not listed at the stock exchange), as if the stock is already vested with the employees and issued on the date of the compensation grant.
Restricted stock 18.
A restricted stock shall be valued at the fair value of a vested and outstanding stock (or the estimated market price, if the stock is not listed at the Stock Exchange).
19. A restricted stock granted to the employees shall be measured at the fair value equals to the value of the same type of restricted stock given to non-employees. Stock option of a Public company 20.
The fair value of an option (or equivalent) of a public company shall be estimated using the option-pricing model. The estimated fair value of the option on the date of the compensation grant should not be adjusted, although there have been changes in the price of the stock, stock’s volatility, option period, dividends from the stock or the risk-free interest rate.
21.
The option pricing model is among other the Black Scholes or binomial model. The variables considered in the option pricing model on the date of the compensation grant are: a. b. c. d. e.
exercise price the option period the current price of the stock stock’s volatility the expected dividend from the stock (except as explained in paragraphs 36 and 37), and Page 6
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f. the risk free interest rate during the option period. 22.
The fair value of an option (or equivalent) of a non-public company shall be estimated using the option pricing model which considers the variables mentioned in paragraph 21, except the stock’s volatility during the option period.
23.
The value of an option estimated using the option pricing model without considering the stock’s volatility is known as the minimum value.
24.
Other than using the option pricing model without the variable of stock’s volatility, the minimum value can also be calculated by determining the difference between (a) the current price of the stock less the present value of dividends during the option period and (b) the present value of the exercise price. Since the calculation of the present values, either the present value during the option period or the present value of the exercise price can produce different results, the minimum values calculated using this method will also vary.
Difficulties in Estimating 25.
Generally, the fair value of an equity instrument can be estimated on the date of the compensation grant. However, under certain situations, the fair value of the instrument would be difficult to estimate on the date of the compensation grant. As an example, the fair value of an option, the exercise price of which changes in accordance with the changes in the price of the stock, will be difficult, and even impossible to estimate. The same applies to instruments which can be converted with a ratio depending on an event in the future.
26.
If the fair value of an option or other equity instrument cannot be estimated on the date of the compensation grant, the compensation expenses shall be determined based on the fair value measured using the price of the stock and other related variables on the date closest to the date of the compensation grant, on which date the various variables can be estimated. To the extent it is not possible to estimate the period of the fair value, the estimated compensation expenses shall be based on the current intrinsic value of the compensation, which shall be determined in accordance with the requirements that will be applicable if the option or the other equity instrument can be exercised at this time.
27.
Generally, the date of the estimated compensation expenses is the date when the number of stocks which will be vested with the employees and the exercise price can be determined.
Employee Stock Purchase Plan 28.
An employee stock purchase plan which satisfies all of the criteria contained in paragraphs 29 does not represent a compensation to the employees (not compensatory). For not-compensatory program, the amount of discount Page 7
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(representing the sale of stock below its fair value) will reduce the amount obtained from the issuance of the stocks. 29.
A program is not an employee compensation program, if it satisfies all of the following criteria : a.
The program does not include an option, except for the followings : (i). Employees are given the opportunity to participate in the program during a short period, which does not exceed 31 days after the purchase price is determined. (ii). The selling price is only based on the market price of the stock at the date of purchase and employees are allowed to cancel their participation before the purchase date and retrieve their payments.
b.
The discount on the market price does not exceed the highest between : (i). the discount per share at a proper amount in a stock offering to the shareholders or other parties, (ii). the issuance expenses per share which can be avoided because the stock issuance was not made through a general offering to the public. In this case, a discount of 5% or less from the market price must be regarded to have met the criteria without further authentication. Substantially all full time employees have an equitable basis of participation.
c. 30.
A program stipulating that the purchase price shall be based on the lower amount between the market price of stock on the date of the compensation grant or the market price on the date of purchase, is one of the example of the characteristic of an option which will cause the program to be regarded as an employee compensation program. Similarly, a program, where the purchase price is based on the market price of the stock on the date of the compensation grant and which allows the employees to cancel their participation before the purchase date and receive back the payments they have made, is an employee compensation program.
Compensation made through cash payments 31.
A certain stock based compensation program may result in the company’s obligation to the employees, as the employees can demand the company to provide the compensation through cash payments or through the transfer of other assets to the employees in lieu of the issuance of an equity instrument.
32.
For each period, the amount of compensation program obligation which can create a liability mentioned in paragraph 31 shall be measured at the current price of the stock. Changes in the prices of the stock during the service period of an employee shall be recognized as compensation expenses during the employee’s service period. Changes in the amount of liability as a result of changes in the price of the stock after the employee’s service period represent compensation expense which shall be charged to the period, during which the changes occurred.
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33.
SFAS No. 53
Following is an example of a compensation, which must be settled through cash payment. A company is obligated, either on demand or at a stipulated time to pay the employees an amount of cash based on the increase of the market price of a stock from a certain price.
Recognition of compensation expenses 34.
The amount of compensation expenses, which shall be recognized for an employee stock based compensation program shall be determined based on the number of equity instruments which ultimately will be vested with the employees. If an employee fails to fulfill the service requirement to obtain a right on compensation under a fixed award, the compensation expenses originating from the compensation program which the employee failed to obtain, shall not be recognized by the company. The compensation expenses also shall not be recognized, if the company fails to meet a performance requirement (for example, the company does not obtain a net profit as stipulated in the program). However, the compensation expenses will still be recognized, if the requirements to obtain the right on compensation or exercise are based on a target stock price or a certain intrinsic value.
35.
For a compensation program with the condition that the right on compensation or exercise price shall be obtained based on a target stock price or a certain intrinsic value the compensation expenses shall be recognized for a compensation program granted to the employees, who are still working during the stipulated period, disregarding whether the target stock price or a certain intrinsic value has been reached or not. Compensation expenses which have been recognized during the previous periods should not be adjusted, if the option vested with the employees already expired without being exercised.
36.
The right on a stock based compensation program shall be vested with the employees, at the time employees are no longer dependent on the fulfillment of the requirements stipulated in the program to obtain the right or retain a stock or cash based on the program. Generally, an option can be exercised immediately. However, if the performance requirement affects the exercise price or the date the option can be exercised, the employee’s service period for the determination of the compensation must be consistent with the assumptions used to estimate the fair value of the compensation program.
37.
On the date the compensation is granted, the company may elect to use an accrual basic for the recognition of compensation expenses based on best estimate available on the number of equity instrument which are expected to be vested with the employees. If necessary the estimate may be revised, if information during the succeeding period indicates that the actual number of failed options differs from the original estimate. Or, the company can start recognizing the compensation expenses, as if all the equity instruments that will be granted (which are only limited by the service requirement) are expected to be vested with the employees, while the actual number of failed options will be recognized at the time of occurrence.
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38.
Compensation expenses which are estimated on the date the compensation is granted for the number of equity instruments which are expected to be vested with the employees based on the performance requirement, shall be adjusted for subsequent changes on the expected or actual results of the service and performance requirements until the date of the compensation right. The adjustment is also applicable to instruments, the ownership of which depends on future services. As indicated in paragraph 37 the company shall estimate the number of failed options on the date of the compensation grant. This estimate shall be adjusted for subsequent changes in the service requirement and shall be made until the date of the compensation right. A change in the estimated number of stocks or options expected to be vested with the employees is a change in an accounting estimate, and the cumulative effect of such changes shall be recognized during the period of occurrence, if the change affects the current and previous periods.
39.
The compensation expenses of a grant of an equity instrument program to the employees shall be recognized during the service period of the employees, namely through the recognition of the compensation expenses and crediting paid-in capital, if the compensation is for future services. If the employee’s service period is not determined for an earlier or shorter period, the employee’s service period is regarded to be the same period from the date of the compensation grant until the date the compensation is vested with the employee and the exercise is no longer dependent on the continuance of the employee’s service period. If the compensation program is for past services, the compensation expenses shall be recognized during the period of the compensation grant.
40.
Compensation expenses under a graded vesting schedule shall be recognized with the assumption that the fair value of such program shall be determined based on different expected period of options to be vested with the employees each year, as if the program consists of several separate programs with different effective dates and employees’ compensation right. If the expected period of the compensation program is determined through other methods, the compensation expenses shall be recognized on a straight-line basis. However, the amount of compensation expenses recognized on a certain date shall, at least equals the value of the compensation which are already vested with the employees on that date.
41.
Dividends or dividend equivalents paid to the employees as part of the stock compensation program or other equity instruments vested with the employees shall be charged to the retained earnings account. Dividends or dividend equivalents which are non-forfeitable, paid on non-vested stocks shall be recognized as an additional compensation expense. The choice to estimate forfeitures at the time of occurrence as described in paragraph 37, also applies to the recognition of nonforfeitable dividends paid on non-vested stocks.
42.
If employees receive a dividend from a group of stocks which are granted to them, only after the stocks are vested with them, the value of the compensation program on the date of the compensation grant shall be reduced by the present value of the estimated dividends which will be paid on the stocks during the period of the compensation grant at a discount rate equal to the appropriate risk free interest rate. The fair value of a stock option Page 10
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compensation program, the dividend equivalent of which is paid to the employees or deducted from the exercise price in accordance with the anti-dilution requirement shall be estimated on the assumption that there is no payment of dividend. Additional Program and changes of an on-going Program 43.
The fair value of any equity instrument compensation program shall be measured separately based on the conditions and the current price of stock and other related factors, on the date of the compensation grant.
44.
Changes in the conditions of a compensation program that can make the program more valuable represents an exchange transaction between the old program and a new program. The difference between the two values shall be recognized during the period of change.
45.
An exchange of the options or a change in the conditions of an option which is related to a business combination, or other equity restructuring transactions, except for transaction performed to reflect the exchange condition of stock in a business combination treated with a pooling of interests method, constitutes a change in program regulated by this statement. However, a change in the conditions of a compensation program made in accordance with the provision of a designed anti-dilution, for example to equalize the value of an option before and after a stock split or stock dividend, does not constitute a change in the program according to this statement.
Completion of the compensation program 46.
The amount of cash or other asset paid (or the liability created) to recover the equity instrument already vested with the employee shall be charged to the equity, with the condition that the amount of payment shall not exceed the value of the instrument recovered. A company, which settles a compensation program which is not vested yet with the employee in cash, essentially grants a compensation program to the employees. Therefore, the amount of compensation expenses measured on the date the compensation was granted, but which has not been recognized yet, shall be recognized on the date of the recovery.
47.
As an example, if a company recovers its stock at the price of Rp 10,000 on the date the stock is vested with the employee and on the same date the market price of the stock is Rp 10,000, the transaction does not result in any additional compensation expenses. However, if the market price of the stock is only Rp 8,000,- on the same date, the transaction will cause an additional expense of Rp 2,000,- (Rp 10,000 - Rp 8,000).
48.
In respect of stock options for employees, the additional expense in the form of the difference between the value of the new option and the value of the old option, if any, shall be recognized as additional compensation expenses at the time the cash payment is determined by comparing the amount paid with the value of the option recovered, which is calculated based on expected remaining period of option on the date of recognition. As Page 11
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regulated in paragraph 46, if an option is recovered before the option is vested with the employee, the amount of compensation expenses which has not been recognized yet shall be charged on the date of recovery. 49.
The accounting treatment shall reflect the conditions of a stock based compensation program as mutually comprehended by the employees and the company. Generally, a written document of the compensation program constitutes the best evidence on the terms and conditions of the program. However, company practices in the past may provide an indication that in substantive terms the prevailing conditions differ from the written conditions. In such case, the accounting treatment shall be based on the substance of the conditions of the compensation program.
50.
An example of an accounting treatment based on the substantive terms of a compensation program is a company that grants a tandem award, consisting of a stock option or stock appreciation right (SAR). The company is obligated to make cash payment, if the employee can choose one of the two instruments. Conversely, if the choice between the two instruments is made by the company, the company can avoid transferring the asset by making settlement through the issuance of stocks as an equity instrument. However, if the company has the choice to make settlement through the issuance of stocks, but tends to make cash payment, or if the company make cash payments each time an employee asks for a cash payment, the company is actually settling its liability and is not recovering its equity instrument. In this case, the substantive terms shall become the base of accounting.
51.
A non-public company may require that its equity instrument will be recovered at the fair value on the date of recovery to maintain control within a limited group, for example family members only. In practice, such condition is not considered as an effort to convert a stock into a liability. This statement does not intend to change the opinion regarding the effect of an agreement for the recovery at the fair value for non-public companies. Accordingly, a non-public company can grant or issue an equity instrument to its employees with such agreement for recovery. The agreement for recovery does not change the equity instrument into a liability, if the recovery price is the fair value on the date of recovery.
Disclosures 52.
A company which has one or more stock based compensation programs shall present an explanation regarding the compensation program, including the general terms and conditions of the compensation program, such as the conditions for the granting of compensation right, the maximum period of option, and the number of stocks stipulated for an option or other equity instruments. A company that uses an equity instrument as a compensation for the procurement of goods or services from nonemployee parties shall make the same disclosures as prescribed in this paragraph and paragraphs 53 and 54., to the extent the disclosures are required to comprehend the effect of the transactions on the financial report.
53.
The following information shall be disclosed in the notes to the financial statements : Page 12
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a. The number and the weighted average of the exercise price of the option for each of the following groups of options. (i). options outstanding at the beginning of the year (ii). options outstanding at the end of the year (iii). options that can be exercised at the end of the year. (iv). Options granted during a period (v). Options exercised during a period (vi). Options forfeited by the employees during a period. (vii). Options expired during a period. b.
The weighted average fair value of an option on the date of the compensation grant during a period. If the exercise price differs from the market price of stock on the date of the compensation grant, the weighted average of the exercise price and the weighted average of the fair value of the option shall be disclosed separately for options with an exercise price (1) equals to, (2) exceeding, or (3) below the market price of stock on the compensation date.
c.
The number and the weighted average of the fair value of equity instruments other than an option on the date of the compensation grant, as an example non-vested stock, granted during a period.
d.
An explanation regarding the method and significant assumptions used during a period to estimate the fair value of an option, including information on the weighted averages of the following variables : (i). (ii). (iii). (iv).
risk free interest rate expected period of option expected stock’s volatility Expected dividends
e. The amount of compensation expenses recognized for a stock based compensation program. f. Significant changes in the conditions of an on-going compensation program. 54.
A company that grant an option with several stock based compensation programs shall present the above information, separately for different types of program, if the differences in the characteristics of the programs require separate disclosures.
55.
As an example, the weighted average exercise price at the end of the year of an option with a fixed exercise price shall be disclosed separately from the weighted average exercise price at the end of the year of option with an indexed exercise price. Similarly, out of the options which cannot be exercised yet, the number of options that can be exercised if the employees provide additional services shall be disclosed separately from the number of options that can only be exercised if a number of additional conditions have already been fulfilled. Page 13
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56.
SFAS No. 53
The spread of the exercise price (also the weighted average exercise price) and the weighted average remaining option period shall be disclosed for options outstanding on the latest balance sheet date. If the price spread is very large (for example, the highest exercise price exceeds 150% of the lowest exercise price), the exercise prices shall be grouped into smaller spreads to determine the number and the time of the issuance of additional stocks and cash receipts from the exercise of the options. The following information shall be disclosed for each group of spread : a. The amount, weighted average of the exercise price and the weighted average of option period for options outstanding. b. The amount and weighted average of the exercise price of the latest option exercised.
TRANSITIONAL PERIOD 57 This statement must be progressively applied. The financial statements prior to the application of this Statement need not be restated. EFFECTIVE DATE 58 This statement will become effective for restructuring transactions which occurs as of October 1, 1998. An earlier application of this Statement is encouraged.
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ATTACHMENT Illustrative example This attachment is only an illustration and is not part of the statement. The objective of this attachment is to provide an illustration of the application of this statement to assist users to comprehend the meanings. Example 1 PT MHD is a public company that grant an option with a maximum period of 10 years to its employees. The exercise price of each option is the same as the market price of stock on the date of the compensation grant. All options will be vested with the employees at the end of the third year (cliff vesting). In this example, the tax effect on the grant of the option is disregarded. Following are the assumptions and information on the options granted on 1 January 19X8 (date of the compensation grant). Stock options granted Employees receiving stock options Forfeitures Price of Stock Exercise price Expected option period (years) Risk free interest rate Expected stock’s volatility Expected dividends
900,000 3,000 3% 50,000 50,000 6 7.5% 30% 2.5%
With six latest variables listed in the above table (namely price of stock, exercise price, expected option period, risk free interest rate, expected stock’s volatility and expected dividends), the Black-Scholes stock option pricing model adjusted for the dividend variable determined the fair value of each option at Rp 17,150. Using the same variables, the binominal model will produce a fair value of Rp 17,260. If PT MHD does not pay dividends and the other variables remain the same, the two stock option pricing models will produce the same fair value, namely Rp. 22,800,-. This example uses the fair value of the Black-Scholes model, namely Rp 17,150,-. The amount of compensation expenses recognized during the vesting period is the fair value of all options which have actually been vested with the employees. This statement allows the company to estimate on the date of the compensation grant, the number of options expected to be vested with the employees or to recognize the compensation expenses for each period based on the number of options forfeited. If a stock option is forfeited, the adjustment to eliminate compensation expenses which have been recognized during the preceeding period must be made at the time of the forfetitures. In this examples, PT MHD makes an estimate, on the date of the compensation grant, of the number of options expected to be vested with the employees and subsequently makes an adjustment, if there is a change in the expected forfeitures and a difference between the expected and actual number of forfeitures. On the date of the compensation grant, the number of options expected to be vested with the employees is 821,406 (900,000 x 0.97 x Page 15
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0.97 x 0.97). The estimated value of the compensation program as of 1 January 19x8 is Rp 14.087,113,000 (821,406 x Rp 17,150). The compensation expenses which will be recognized each year during the three year vesting period is Rp 4,695,704,000 (14,087,113,000 : 3). The accounting entry to recognize the compensation expense in year 19x8 is as follows : DR CR
Compensation expenses Other Capital (Stock Option)
4,695,704,000 4,695,704,000
In the absence of a change in estimate or a difference between the estimated and actual forfeitures, PT MHD will pass the same accounting entry in year 19x9 and 20x0. On 31 December 20x0, PT MHD will compare the actual forfeitures with the estimate and make an adjustment, so that the compensation expenses recognized only cover the number of options which are actually vested with the employees. In this example, it is assumed that there is no adjustment made. On the exercise date, all options are assumed to be exercised on the same date. The price of the stock on the exercise date is Rp70,000,-. The accounting entry made on the exercise date is as follows : DR CR
Cash (821,406 x 50,000) Other Capital (Stock Option)
41,070,300,000 14,087,113,000
Capital Stock
55,157,413,000
Example 2 All assumptions and information for this example are the same as example 1, unless stated otherwise. At the end of the second year (19x9), management revised the estimate of forfeitures from 3% to 6% each year. Accordingly, the number of options which are expected to be vested with the employees became 747,526 (900,000 x 0.94 x 0.94 x 0.94) and the total compensation expenses changed to 12,820,071,000 (747,526 x Rp17,150). Assuming that the compensation expenses for the second year have been recognized, the adjustment to be made is as follows :
Total revised compensation expenses Total revised compensation expenses as of 31/12/1909 (Rp 12,820,071,000 x 2/3)
12,820,071,000 8,546,714,000 Page 16
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Amounts recognized in year 1908 and 1909 (Rp 4,695,704,000 x 2) Adjustment of the compensation expenses as of 31/12/19x9
9,391,408,000 (
844,694,000)
_______________________________________
The accounting entries made by PT MHD are as follows : 31/12/1909
DR CR
Other capital (stock option) Compensation Expenses
844,694,000 844,694,000
year 20x0
DR Compensation Expenses 4,273,357,000 CR Other capital (Stock option)4,273,357,000 (Compensation expenses Rp12,820,071,000 : 3 = Rp 4,273,357,000)
Exercise
DR DR CR
Cash 37,376,300,000 Other capital (stock option) 12,820,071,000 Capital Stock 50,196,371,000 (Cash = 747,526 x Rp50,000 = Rp. 37,376,300,000,-.
Example 3 PT AMP implements a Stock Appreciation Rights (SAR) program on 1 January 19x8, which will allow its executives to receive cash in the amount of the difference between the market price of stock on exercise date at a stipulated price (namely Rp 10,000 of 11,000 SAR) on the exercise date. The service period of the employees is two years. The stock prices are as follows : Date
Stock price
31 December 19x8 31 December 19x9 31 December 20x0
13,000 17,000 15,000
Assuming that the executives will realize the SAR program at the end of the third year, the amounts of compensation expenses to be recorded for each period are as follows : Date
Market Price
Stipulated Cumulative Percentage of Cumulative price for compensation that Recognition compensation 10,000 SAR can be recognized recognized
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31/12/x8
13,000
10,000
30,000,000
50%
15,000,000
31/12/x9
17,000
10,000
70,000,000
100%
31/12/x0
15,000
10,000
50,000,000
100%
55,000,000 70,000,000 (20,000,000) 50,000,000
The accounting entries made are as follows : 31/12/x8 31/12/x9
DR Compensation Expenses CR SAR Program Liability
15,000,000
DR Compensation Expenses CR SAR Program Liability
55,000,000
15,000,000 55,000,000
31/12/x0
DR SAR Program Liability 20,000,000 CR Compensation Expenses 20,000,000
31/12/x0
DR SAR Program Liability Cash
50,000,000 50,000,000
Page 18
SFAS No. 53
CONTENTS Paragraph INTRODUCTION Objective Scope Definitions
01 - 06 01 - 02 03 - 05 06
COMPENSATION TRANSACTIONS FOR NON-EMPLOYEES
07 - 09
COMPENSATION TRANSACTIONS FOR EMPLOYEES
10 - 51
Basis of Measurement Objective and Date of Measurement Determination of the Fair Value Method of Measurement Compensation made through the issuance of an equity instrument Non-vested stock Restricted Stock Stock option of a Public Company Difficulties in Estimating Employee Stock Purchase Plans Compensation made through cash payments Recognition of compensation Expenses Additional Program and a Change in the on-going program Completion of the Compensation Program DISCLOSURES
10 - 11 12 - 14 15 - 16 17 - 27 17 - 25 17 18 - 19 20 - 34 25 - 27 28 - 30 31 - 33 34 - 42 43 - 45 46 - 51 52 - 56
TRANSITION PERIOD
57
EFFECTIVE DATE
58
Attachment
Paragraphs printed in bold letters are standard paragraphs, which must be read in the context of the explanatory paragraphs and implementation guidance printed in normal
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letters. There is no requirement to apply this statement on items considered to be immaterial. INTRODUCTION 01.
The objective of this statement is to regulate the accounting treatment of stock based compensation.
02.
The term “compensation” used in this statement covers all remuneration provided by a company to the suppliers of goods and services. Suppliers include employees and nonemployees. In a transaction for the procurement of goods and services, a company can adopt a method of making compensation by issuing an equity instrument or by recognizing a liability, the amount of which is determined based on the price of a stock or an equity instrument of the company. To attract employees of high quality, the company can design a compensation program, under which an equity instrument will be granted to the employees. Similarly, the same method can be used to develop business partnership with the suppliers and business counterparts.
Scope 03.
This statement is applicable to all transactions for the procurement of goods or services by a company with a remuneration or compensation in the form of an equity instrument or a liability, the amount of which is determined based on the price of an equity instrument.
04.
This statement must be applied on all compensation transactions provided by the company to the employees in the form of equity instrument such as shares and shares option. The compensation can also be provided in the form of a recognition of a liability by the company as the employer to the employees, the amount of which is determined based on the price of an equity instrument.
05.
This statement shall also be applied on all transactions for the procurement of goods or services by the company from non-employee suppliers with remuneration or compensation in the form of an equity instrument.
Definitions 06.
Followings are definitions of terms used in this statement :
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Fixed award is an employees’ stock based compensation program, which requires, that in order to be able to obtain a right of compensation, an employee must have served the company continuously for a certain period of time. In determining the right on the compensation, employee’s performance is not considered. Intrinsic value is the excess difference between the market price of a stock and the option price of the stock at the time of execution. For example, if the execution price of an option is Rp 20,000,-, while the market price of the underlying stock is Rp 25,000,-, the intrinsic value of the stock option is Rp 5,000,- (namely Rp 25,000,- Rp 20,000,-). Minimum value is the value of the option calculated using the option-pricing model without contemplating the expected price fluctuation of the underlying stock. Fair value is an amount that can be used as a base for an exchange of asset or a settlement of a liability between knowledgeable parties who are willing to conduct an arm’s length transaction. Public company is a company with a legal form of a “perseroan terbatas” (limited liability company - PT), which shares are already owned by at least 300 (three hundred) shareholders and with a paid-in capital of at least Rp 3,000,000,000,(three billion rupiah) or a number of shareholders and amount of paid-in capital stipulated by government regulation. Non-public company is a company other than a public company or a company that does not meet the criteria of a public company. Service period is a period during which an employee provided services to the company that gives him a right on a stock based compensation. Non-vested stock is a stock that cannot be sold to another party, since the employee who obtained the stock has not satisfied the requirements for a compensation entitlement. Restricted stocks are a number of stocks, the sales of which are restricted during a certain period due to an agreement or government regulation, although the employee has fulfilled all of the requirements to own the stock. Tandem award is a compensation program with two (or more) components where, if one of the components is executed, the other components will become void accordingly. Grant date is the date the company and the employee reach an agreement on the terms and conditions of a stock based compensation program. On the date the compensation is granted, the company has a conditional obligation to issue the equity instrument or to transfer asset to an employee having satisfied the terms of a compensation entitlement.
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Vested with compensation is to obtain a right on the benefit of a compensation program. An employee stock based compensation program is considered vested with the employee at the time the employee’s right is no longer dependent on the services of the employee or on the fulfillment of performance requirements to receive or retain stock or cash from the compensation program. Volatility is a measurement of the changes in the price of a stock which have occurred during a certain period (historical volatility) or a measurement of changes in the price of a stock which are expected to occur during a certain period (expected volatility) (The volatility of a stock represents the standard deviation of a continuous compounded rate of return from a stock for a certain period). NON -EMPLOYEE COMPENSATION TRANSACTIONS 07.
If a company issues an equity instrument as a compensation for the procurement of goods or services from a non-employee party, the transaction of compensation shall be treated based on the fair value of the goods/services or the fair value of the equity instrument issued, whichever is more reliably measured.
08.
The fair values of goods or services procured from non-employee suppliers are generally reliably measured and therefore can be used as an indicator of the fair value of the equity instrument issued. The fair value of the equity instrument issued must be used as a base for the measurement of the compensation transaction, if such value is more reliably measured compared to the fair value of goods or services procured. As an example, in a business combination transaction treated using the purchase method, the fair value of the tradable - equity instrument issued is used as a basis of measurement, since the value of the equity instrument issued is more reliably measured compared to the value of net assets of the company acquired.
09.
If the fair value of goods or services procured is not reliably measured, the transaction for the procurement of goods or services from non-employee party must be measured using the fair value of the equity instrument issued at the time the compensation agreement is legally binding.
TRANSACTION OF A COMPENSATION FOR EMPLOYEES Basis of Measurement 10.
Generally, part or the whole remuneration in the form of equity instrument granted to an employee is a compensation for the services of the employee, either for past or future services.
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11.
An equity instrument granted to an employee as a remuneration and compensation of employee’s services shall be measured and recognized at the fair value of the related equity instrument. The part of the fair value of the equity instrument that can be accounted for as employee’s services is the net amount, namely the fair value after deducting the amount that should be paid by the employee at the time the equity instrument is granted.
12.
Any equity instrument granted or transferred directly to the employee by the shareholders shall be treated as a stock-based compensation. Therefore, such transaction shall be treated in accordance with this statement, unless the transfer is intended clearly for other than compensation purposes. The substance of the transaction of the transfer of the equity instrument by the shareholders to the employees is a contribution of capital by the shareholders to the company and a grant of an equity instrument by the company to the employee. However, it is also possible that the direct transfer of an equity instrument from the shareholders to the employees is not a compensation transaction. As an example, the company directly transfers an equity instrument to settle a liability of the shareholders, which is not related to employment whatsoever.
Objective and Date of Measurement 13.
The objective of the measurement is to estimate the fair value of the equity instrument based on the price of the stock on the date the compensation is granted, which will be vested with the employees, after they have provided the required services and fulfilled the other requirements to obtain the right on the benefit of the instrument (for example to exercise a stock option or to sell a stock).
14.
Any prevailing restriction after the right on the benefit of the instrument is vested with the employees, such as not being allowed to transfer the option right to a third party, will affect the value of the instrument, and accordingly must be considered in the fair value of the instrument. However, a restriction caused by the non-validity of the instrument, the right on which is not vested yet with the employees, such as the inability to exercise an option without a right or to sell a stock without a right, will not affect the value of the instrument on the date the right on compensation is granted and accordingly its effect shall not be considered in the determination of the fair value of the instrument. Conversely, the value of an instrument, the right on which is already vested with the employee, shall not be recognized, if the employee fails to fulfill the requirements with respect to his services or performance.
Determination of the fair value 15.
The fair value shall be determined as follows : a. The fair value shall be determined based on the market price of an active market. b. If it is not possible to obtain such market price, the fair value shall be determined through an estimate based on the price of the same type of asset.
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c. If such estimate is not possible to obtain, the fair value shall be determined based on a valuation method appropriate to the conditions. 16.
Examples of the method for the determination of the fair value are discounted cash flow, option pricing models, matrix pricing, option-adjusted spread models and fundamental analysis.
Method of measurement Compensation made through the issuance of equity instrument. Non-vested stock 17.
The fair value of a non-vested stock granted to the employees shall be measured at the market price of the stock (or the estimated market price if the stock is not listed at the stock exchange), as if the stock is already vested with the employees and issued on the date of the compensation grant.
Restricted stock 18.
A restricted stock shall be valued at the fair value of a vested and outstanding stock (or the estimated market price, if the stock is not listed at the Stock Exchange).
19. A restricted stock granted to the employees shall be measured at the fair value equals to the value of the same type of restricted stock given to non-employees. Stock option of a Public company 20.
The fair value of an option (or equivalent) of a public company shall be estimated using the option-pricing model. The estimated fair value of the option on the date of the compensation grant should not be adjusted, although there have been changes in the price of the stock, stock’s volatility, option period, dividends from the stock or the risk-free interest rate.
21.
The option pricing model is among other the Black Scholes or binomial model. The variables considered in the option pricing model on the date of the compensation grant are: a. b. c. d. e.
exercise price the option period the current price of the stock stock’s volatility the expected dividend from the stock (except as explained in paragraphs 36 and 37), and Page 6
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f. the risk free interest rate during the option period. 22.
The fair value of an option (or equivalent) of a non-public company shall be estimated using the option pricing model which considers the variables mentioned in paragraph 21, except the stock’s volatility during the option period.
23.
The value of an option estimated using the option pricing model without considering the stock’s volatility is known as the minimum value.
24.
Other than using the option pricing model without the variable of stock’s volatility, the minimum value can also be calculated by determining the difference between (a) the current price of the stock less the present value of dividends during the option period and (b) the present value of the exercise price. Since the calculation of the present values, either the present value during the option period or the present value of the exercise price can produce different results, the minimum values calculated using this method will also vary.
Difficulties in Estimating 25.
Generally, the fair value of an equity instrument can be estimated on the date of the compensation grant. However, under certain situations, the fair value of the instrument would be difficult to estimate on the date of the compensation grant. As an example, the fair value of an option, the exercise price of which changes in accordance with the changes in the price of the stock, will be difficult, and even impossible to estimate. The same applies to instruments which can be converted with a ratio depending on an event in the future.
26.
If the fair value of an option or other equity instrument cannot be estimated on the date of the compensation grant, the compensation expenses shall be determined based on the fair value measured using the price of the stock and other related variables on the date closest to the date of the compensation grant, on which date the various variables can be estimated. To the extent it is not possible to estimate the period of the fair value, the estimated compensation expenses shall be based on the current intrinsic value of the compensation, which shall be determined in accordance with the requirements that will be applicable if the option or the other equity instrument can be exercised at this time.
27.
Generally, the date of the estimated compensation expenses is the date when the number of stocks which will be vested with the employees and the exercise price can be determined.
Employee Stock Purchase Plan 28.
An employee stock purchase plan which satisfies all of the criteria contained in paragraphs 29 does not represent a compensation to the employees (not compensatory). For not-compensatory program, the amount of discount Page 7
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(representing the sale of stock below its fair value) will reduce the amount obtained from the issuance of the stocks. 29.
A program is not an employee compensation program, if it satisfies all of the following criteria : a.
The program does not include an option, except for the followings : (i). Employees are given the opportunity to participate in the program during a short period, which does not exceed 31 days after the purchase price is determined. (ii). The selling price is only based on the market price of the stock at the date of purchase and employees are allowed to cancel their participation before the purchase date and retrieve their payments.
b.
The discount on the market price does not exceed the highest between : (i). the discount per share at a proper amount in a stock offering to the shareholders or other parties, (ii). the issuance expenses per share which can be avoided because the stock issuance was not made through a general offering to the public. In this case, a discount of 5% or less from the market price must be regarded to have met the criteria without further authentication. Substantially all full time employees have an equitable basis of participation.
c. 30.
A program stipulating that the purchase price shall be based on the lower amount between the market price of stock on the date of the compensation grant or the market price on the date of purchase, is one of the example of the characteristic of an option which will cause the program to be regarded as an employee compensation program. Similarly, a program, where the purchase price is based on the market price of the stock on the date of the compensation grant and which allows the employees to cancel their participation before the purchase date and receive back the payments they have made, is an employee compensation program.
Compensation made through cash payments 31.
A certain stock based compensation program may result in the company’s obligation to the employees, as the employees can demand the company to provide the compensation through cash payments or through the transfer of other assets to the employees in lieu of the issuance of an equity instrument.
32.
For each period, the amount of compensation program obligation which can create a liability mentioned in paragraph 31 shall be measured at the current price of the stock. Changes in the prices of the stock during the service period of an employee shall be recognized as compensation expenses during the employee’s service period. Changes in the amount of liability as a result of changes in the price of the stock after the employee’s service period represent compensation expense which shall be charged to the period, during which the changes occurred.
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33.
SFAS No. 53
Following is an example of a compensation, which must be settled through cash payment. A company is obligated, either on demand or at a stipulated time to pay the employees an amount of cash based on the increase of the market price of a stock from a certain price.
Recognition of compensation expenses 34.
The amount of compensation expenses, which shall be recognized for an employee stock based compensation program shall be determined based on the number of equity instruments which ultimately will be vested with the employees. If an employee fails to fulfill the service requirement to obtain a right on compensation under a fixed award, the compensation expenses originating from the compensation program which the employee failed to obtain, shall not be recognized by the company. The compensation expenses also shall not be recognized, if the company fails to meet a performance requirement (for example, the company does not obtain a net profit as stipulated in the program). However, the compensation expenses will still be recognized, if the requirements to obtain the right on compensation or exercise are based on a target stock price or a certain intrinsic value.
35.
For a compensation program with the condition that the right on compensation or exercise price shall be obtained based on a target stock price or a certain intrinsic value the compensation expenses shall be recognized for a compensation program granted to the employees, who are still working during the stipulated period, disregarding whether the target stock price or a certain intrinsic value has been reached or not. Compensation expenses which have been recognized during the previous periods should not be adjusted, if the option vested with the employees already expired without being exercised.
36.
The right on a stock based compensation program shall be vested with the employees, at the time employees are no longer dependent on the fulfillment of the requirements stipulated in the program to obtain the right or retain a stock or cash based on the program. Generally, an option can be exercised immediately. However, if the performance requirement affects the exercise price or the date the option can be exercised, the employee’s service period for the determination of the compensation must be consistent with the assumptions used to estimate the fair value of the compensation program.
37.
On the date the compensation is granted, the company may elect to use an accrual basic for the recognition of compensation expenses based on best estimate available on the number of equity instrument which are expected to be vested with the employees. If necessary the estimate may be revised, if information during the succeeding period indicates that the actual number of failed options differs from the original estimate. Or, the company can start recognizing the compensation expenses, as if all the equity instruments that will be granted (which are only limited by the service requirement) are expected to be vested with the employees, while the actual number of failed options will be recognized at the time of occurrence.
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38.
Compensation expenses which are estimated on the date the compensation is granted for the number of equity instruments which are expected to be vested with the employees based on the performance requirement, shall be adjusted for subsequent changes on the expected or actual results of the service and performance requirements until the date of the compensation right. The adjustment is also applicable to instruments, the ownership of which depends on future services. As indicated in paragraph 37 the company shall estimate the number of failed options on the date of the compensation grant. This estimate shall be adjusted for subsequent changes in the service requirement and shall be made until the date of the compensation right. A change in the estimated number of stocks or options expected to be vested with the employees is a change in an accounting estimate, and the cumulative effect of such changes shall be recognized during the period of occurrence, if the change affects the current and previous periods.
39.
The compensation expenses of a grant of an equity instrument program to the employees shall be recognized during the service period of the employees, namely through the recognition of the compensation expenses and crediting paid-in capital, if the compensation is for future services. If the employee’s service period is not determined for an earlier or shorter period, the employee’s service period is regarded to be the same period from the date of the compensation grant until the date the compensation is vested with the employee and the exercise is no longer dependent on the continuance of the employee’s service period. If the compensation program is for past services, the compensation expenses shall be recognized during the period of the compensation grant.
40.
Compensation expenses under a graded vesting schedule shall be recognized with the assumption that the fair value of such program shall be determined based on different expected period of options to be vested with the employees each year, as if the program consists of several separate programs with different effective dates and employees’ compensation right. If the expected period of the compensation program is determined through other methods, the compensation expenses shall be recognized on a straight-line basis. However, the amount of compensation expenses recognized on a certain date shall, at least equals the value of the compensation which are already vested with the employees on that date.
41.
Dividends or dividend equivalents paid to the employees as part of the stock compensation program or other equity instruments vested with the employees shall be charged to the retained earnings account. Dividends or dividend equivalents which are non-forfeitable, paid on non-vested stocks shall be recognized as an additional compensation expense. The choice to estimate forfeitures at the time of occurrence as described in paragraph 37, also applies to the recognition of nonforfeitable dividends paid on non-vested stocks.
42.
If employees receive a dividend from a group of stocks which are granted to them, only after the stocks are vested with them, the value of the compensation program on the date of the compensation grant shall be reduced by the present value of the estimated dividends which will be paid on the stocks during the period of the compensation grant at a discount rate equal to the appropriate risk free interest rate. The fair value of a stock option Page 10
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compensation program, the dividend equivalent of which is paid to the employees or deducted from the exercise price in accordance with the anti-dilution requirement shall be estimated on the assumption that there is no payment of dividend. Additional Program and changes of an on-going Program 43.
The fair value of any equity instrument compensation program shall be measured separately based on the conditions and the current price of stock and other related factors, on the date of the compensation grant.
44.
Changes in the conditions of a compensation program that can make the program more valuable represents an exchange transaction between the old program and a new program. The difference between the two values shall be recognized during the period of change.
45.
An exchange of the options or a change in the conditions of an option which is related to a business combination, or other equity restructuring transactions, except for transaction performed to reflect the exchange condition of stock in a business combination treated with a pooling of interests method, constitutes a change in program regulated by this statement. However, a change in the conditions of a compensation program made in accordance with the provision of a designed anti-dilution, for example to equalize the value of an option before and after a stock split or stock dividend, does not constitute a change in the program according to this statement.
Completion of the compensation program 46.
The amount of cash or other asset paid (or the liability created) to recover the equity instrument already vested with the employee shall be charged to the equity, with the condition that the amount of payment shall not exceed the value of the instrument recovered. A company, which settles a compensation program which is not vested yet with the employee in cash, essentially grants a compensation program to the employees. Therefore, the amount of compensation expenses measured on the date the compensation was granted, but which has not been recognized yet, shall be recognized on the date of the recovery.
47.
As an example, if a company recovers its stock at the price of Rp 10,000 on the date the stock is vested with the employee and on the same date the market price of the stock is Rp 10,000, the transaction does not result in any additional compensation expenses. However, if the market price of the stock is only Rp 8,000,- on the same date, the transaction will cause an additional expense of Rp 2,000,- (Rp 10,000 - Rp 8,000).
48.
In respect of stock options for employees, the additional expense in the form of the difference between the value of the new option and the value of the old option, if any, shall be recognized as additional compensation expenses at the time the cash payment is determined by comparing the amount paid with the value of the option recovered, which is calculated based on expected remaining period of option on the date of recognition. As Page 11
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regulated in paragraph 46, if an option is recovered before the option is vested with the employee, the amount of compensation expenses which has not been recognized yet shall be charged on the date of recovery. 49.
The accounting treatment shall reflect the conditions of a stock based compensation program as mutually comprehended by the employees and the company. Generally, a written document of the compensation program constitutes the best evidence on the terms and conditions of the program. However, company practices in the past may provide an indication that in substantive terms the prevailing conditions differ from the written conditions. In such case, the accounting treatment shall be based on the substance of the conditions of the compensation program.
50.
An example of an accounting treatment based on the substantive terms of a compensation program is a company that grants a tandem award, consisting of a stock option or stock appreciation right (SAR). The company is obligated to make cash payment, if the employee can choose one of the two instruments. Conversely, if the choice between the two instruments is made by the company, the company can avoid transferring the asset by making settlement through the issuance of stocks as an equity instrument. However, if the company has the choice to make settlement through the issuance of stocks, but tends to make cash payment, or if the company make cash payments each time an employee asks for a cash payment, the company is actually settling its liability and is not recovering its equity instrument. In this case, the substantive terms shall become the base of accounting.
51.
A non-public company may require that its equity instrument will be recovered at the fair value on the date of recovery to maintain control within a limited group, for example family members only. In practice, such condition is not considered as an effort to convert a stock into a liability. This statement does not intend to change the opinion regarding the effect of an agreement for the recovery at the fair value for non-public companies. Accordingly, a non-public company can grant or issue an equity instrument to its employees with such agreement for recovery. The agreement for recovery does not change the equity instrument into a liability, if the recovery price is the fair value on the date of recovery.
Disclosures 52.
A company which has one or more stock based compensation programs shall present an explanation regarding the compensation program, including the general terms and conditions of the compensation program, such as the conditions for the granting of compensation right, the maximum period of option, and the number of stocks stipulated for an option or other equity instruments. A company that uses an equity instrument as a compensation for the procurement of goods or services from nonemployee parties shall make the same disclosures as prescribed in this paragraph and paragraphs 53 and 54., to the extent the disclosures are required to comprehend the effect of the transactions on the financial report.
53.
The following information shall be disclosed in the notes to the financial statements : Page 12
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a. The number and the weighted average of the exercise price of the option for each of the following groups of options. (i). options outstanding at the beginning of the year (ii). options outstanding at the end of the year (iii). options that can be exercised at the end of the year. (iv). Options granted during a period (v). Options exercised during a period (vi). Options forfeited by the employees during a period. (vii). Options expired during a period. b.
The weighted average fair value of an option on the date of the compensation grant during a period. If the exercise price differs from the market price of stock on the date of the compensation grant, the weighted average of the exercise price and the weighted average of the fair value of the option shall be disclosed separately for options with an exercise price (1) equals to, (2) exceeding, or (3) below the market price of stock on the compensation date.
c.
The number and the weighted average of the fair value of equity instruments other than an option on the date of the compensation grant, as an example non-vested stock, granted during a period.
d.
An explanation regarding the method and significant assumptions used during a period to estimate the fair value of an option, including information on the weighted averages of the following variables : (i). (ii). (iii). (iv).
risk free interest rate expected period of option expected stock’s volatility Expected dividends
e. The amount of compensation expenses recognized for a stock based compensation program. f. Significant changes in the conditions of an on-going compensation program. 54.
A company that grant an option with several stock based compensation programs shall present the above information, separately for different types of program, if the differences in the characteristics of the programs require separate disclosures.
55.
As an example, the weighted average exercise price at the end of the year of an option with a fixed exercise price shall be disclosed separately from the weighted average exercise price at the end of the year of option with an indexed exercise price. Similarly, out of the options which cannot be exercised yet, the number of options that can be exercised if the employees provide additional services shall be disclosed separately from the number of options that can only be exercised if a number of additional conditions have already been fulfilled. Page 13
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56.
SFAS No. 53
The spread of the exercise price (also the weighted average exercise price) and the weighted average remaining option period shall be disclosed for options outstanding on the latest balance sheet date. If the price spread is very large (for example, the highest exercise price exceeds 150% of the lowest exercise price), the exercise prices shall be grouped into smaller spreads to determine the number and the time of the issuance of additional stocks and cash receipts from the exercise of the options. The following information shall be disclosed for each group of spread : a. The amount, weighted average of the exercise price and the weighted average of option period for options outstanding. b. The amount and weighted average of the exercise price of the latest option exercised.
TRANSITIONAL PERIOD 57 This statement must be progressively applied. The financial statements prior to the application of this Statement need not be restated. EFFECTIVE DATE 58 This statement will become effective for restructuring transactions which occurs as of October 1, 1998. An earlier application of this Statement is encouraged.
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ATTACHMENT Illustrative example This attachment is only an illustration and is not part of the statement. The objective of this attachment is to provide an illustration of the application of this statement to assist users to comprehend the meanings. Example 1 PT MHD is a public company that grant an option with a maximum period of 10 years to its employees. The exercise price of each option is the same as the market price of stock on the date of the compensation grant. All options will be vested with the employees at the end of the third year (cliff vesting). In this example, the tax effect on the grant of the option is disregarded. Following are the assumptions and information on the options granted on 1 January 19X8 (date of the compensation grant). Stock options granted Employees receiving stock options Forfeitures Price of Stock Exercise price Expected option period (years) Risk free interest rate Expected stock’s volatility Expected dividends
900,000 3,000 3% 50,000 50,000 6 7.5% 30% 2.5%
With six latest variables listed in the above table (namely price of stock, exercise price, expected option period, risk free interest rate, expected stock’s volatility and expected dividends), the Black-Scholes stock option pricing model adjusted for the dividend variable determined the fair value of each option at Rp 17,150. Using the same variables, the binominal model will produce a fair value of Rp 17,260. If PT MHD does not pay dividends and the other variables remain the same, the two stock option pricing models will produce the same fair value, namely Rp. 22,800,-. This example uses the fair value of the Black-Scholes model, namely Rp 17,150,-. The amount of compensation expenses recognized during the vesting period is the fair value of all options which have actually been vested with the employees. This statement allows the company to estimate on the date of the compensation grant, the number of options expected to be vested with the employees or to recognize the compensation expenses for each period based on the number of options forfeited. If a stock option is forfeited, the adjustment to eliminate compensation expenses which have been recognized during the preceeding period must be made at the time of the forfetitures. In this examples, PT MHD makes an estimate, on the date of the compensation grant, of the number of options expected to be vested with the employees and subsequently makes an adjustment, if there is a change in the expected forfeitures and a difference between the expected and actual number of forfeitures. On the date of the compensation grant, the number of options expected to be vested with the employees is 821,406 (900,000 x 0.97 x Page 15
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0.97 x 0.97). The estimated value of the compensation program as of 1 January 19x8 is Rp 14.087,113,000 (821,406 x Rp 17,150). The compensation expenses which will be recognized each year during the three year vesting period is Rp 4,695,704,000 (14,087,113,000 : 3). The accounting entry to recognize the compensation expense in year 19x8 is as follows : DR CR
Compensation expenses Other Capital (Stock Option)
4,695,704,000 4,695,704,000
In the absence of a change in estimate or a difference between the estimated and actual forfeitures, PT MHD will pass the same accounting entry in year 19x9 and 20x0. On 31 December 20x0, PT MHD will compare the actual forfeitures with the estimate and make an adjustment, so that the compensation expenses recognized only cover the number of options which are actually vested with the employees. In this example, it is assumed that there is no adjustment made. On the exercise date, all options are assumed to be exercised on the same date. The price of the stock on the exercise date is Rp70,000,-. The accounting entry made on the exercise date is as follows : DR CR
Cash (821,406 x 50,000) Other Capital (Stock Option)
41,070,300,000 14,087,113,000
Capital Stock
55,157,413,000
Example 2 All assumptions and information for this example are the same as example 1, unless stated otherwise. At the end of the second year (19x9), management revised the estimate of forfeitures from 3% to 6% each year. Accordingly, the number of options which are expected to be vested with the employees became 747,526 (900,000 x 0.94 x 0.94 x 0.94) and the total compensation expenses changed to 12,820,071,000 (747,526 x Rp17,150). Assuming that the compensation expenses for the second year have been recognized, the adjustment to be made is as follows :
Total revised compensation expenses Total revised compensation expenses as of 31/12/1909 (Rp 12,820,071,000 x 2/3)
12,820,071,000 8,546,714,000 Page 16
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Amounts recognized in year 1908 and 1909 (Rp 4,695,704,000 x 2) Adjustment of the compensation expenses as of 31/12/19x9
9,391,408,000 (
844,694,000)
_______________________________________
The accounting entries made by PT MHD are as follows : 31/12/1909
DR CR
Other capital (stock option) Compensation Expenses
844,694,000 844,694,000
year 20x0
DR Compensation Expenses 4,273,357,000 CR Other capital (Stock option)4,273,357,000 (Compensation expenses Rp12,820,071,000 : 3 = Rp 4,273,357,000)
Exercise
DR DR CR
Cash 37,376,300,000 Other capital (stock option) 12,820,071,000 Capital Stock 50,196,371,000 (Cash = 747,526 x Rp50,000 = Rp. 37,376,300,000,-.
Example 3 PT AMP implements a Stock Appreciation Rights (SAR) program on 1 January 19x8, which will allow its executives to receive cash in the amount of the difference between the market price of stock on exercise date at a stipulated price (namely Rp 10,000 of 11,000 SAR) on the exercise date. The service period of the employees is two years. The stock prices are as follows : Date
Stock price
31 December 19x8 31 December 19x9 31 December 20x0
13,000 17,000 15,000
Assuming that the executives will realize the SAR program at the end of the third year, the amounts of compensation expenses to be recorded for each period are as follows : Date
Market Price
Stipulated Cumulative Percentage of Cumulative price for compensation that Recognition compensation 10,000 SAR can be recognized recognized
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31/12/x8
13,000
10,000
30,000,000
50%
15,000,000
31/12/x9
17,000
10,000
70,000,000
100%
31/12/x0
15,000
10,000
50,000,000
100%
55,000,000 70,000,000 (20,000,000) 50,000,000
The accounting entries made are as follows : 31/12/x8 31/12/x9
DR Compensation Expenses CR SAR Program Liability
15,000,000
DR Compensation Expenses CR SAR Program Liability
55,000,000
15,000,000 55,000,000
31/12/x0
DR SAR Program Liability 20,000,000 CR Compensation Expenses 20,000,000
31/12/x0
DR SAR Program Liability Cash
50,000,000 50,000,000
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