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Chapter 2: The 2004 Proposed FAS 123 Requirements. The FASB concluded that the 2004 proposed FAS 123 would require a single method of accruing compensation cost for awards with a graded vesting schedule. | 2 The 2004 Proposed FAS 123 Requirements FAS 123 BACKGROUND The proposed 2004 FAS 123 revision explains that a better estimate of the fair value of an employee share option may be obtained by using a binomial lattice model that incorporates employees expected exercise and expected post-vesting employment termination behavior than by using a closed-form model such as the Black-Scholes-Merton or BSM formula with a single weighted-average expected option term as an input. Further this revised statement does not permit the use of the minimum value method as a substitute for the fair-value-based method.1 In addition the 1995 FAS 123 provided alternative methods of measuring and recognizing compensation cost for awards with graded vesting that is awards for which different parts vest at different times. The revised 2004 FAS 123 requires a single method under which those different parts are treated as separate awards in estimating fair value and attributing compensation cost. The 1995 FAS 123 permitted enterprises the option of continuing to use Opinion 25 s intrinsic-value method of accounting for share-based payments to employees provided those enterprises supplementally disclosed pro forma net income and related pro forma earnings-per-share information if earnings per share is presented as if the fair-value-based method of accounting had been used. For the reasons described in paragraphs C26 through C30 of the proposed 2004 FAS 123 revision the FASB concluded that such pro forma disclosures are not an appropriate substitute for recognition of compensation cost in the financial statements. The FASB Board of Directors believes fair value is the relevant measurement attribute and grant date is the relevant measurement date. 11 12 IMPACTS OF THE NEW FAS 123 METHODOLOGY Further the FASB has determined that the BSM formula and similar closed-form models do not produce reasonable estimates of fair value because they do not adequately take into account the unique .
