FASB Statement No. 123 (R) — A Brief Overview Issued December 2004

FASB Statement No. 123 (R), Share Based Payment replaces Statement No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.

Statement No. 123, issued in October 1995, required that all share-based compensation be measured at fair value. However, it also provided an alternative for an entity to use Opinion 25’s intrinsic value method of accounting, which generally resulted in little or no compensation cost being recognized.

Statement No. 123 (R) provides investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is the result of a two year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based compensation arrangements with employees. Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.

Public entities (other than those filing as small business issuers) are required to apply Statement No. 123 (R) as of the first interim or annual reporting period that begins after June 15, 2005.

Public entities that file as small business issuers will be required to apply Statement No. 123 (R) in the first interim or annual reporting period that begins after December 15, 2005.

Nonpublic entities will be required to apply Statement No. 123 (R) in the beginning of the first annual reporting period after December 15, 2005.

Disclosures required under FAS 123 (R) include:

• Nature and terms of share based payment arrangements and their potential effects on shareholders
• Effect of the compensation cost from share based payment arrangements on the income statement
• Method of estimating fair value
• Cash flow effect resulting from share based payment arrangements

Statement No. 123 (R) includes an appendix that provides expanded guidance on measuring the fair value of share-based payment awards. In developing that guidance, the FASB included several special measurement provisions for private companies designed to ease implementation. This guidance also includes numerous examples illustrating the accounting for common types of share-based compensation arrangements. Companies can choose an option pricing model that appropriately reflects the specific circumstances and economics of their stock based payments. Most companies choose the Black Scholes model or the binomial model.

To view Statement No. 123 (R) go to the FASB website at www.fasb.org.