Miller Corporation has been in operation for several years. Each year around Dec
ID: 2798095 • Letter: M
Question
Miller Corporation has been in operation for several years. Each year around December 30 Miller gives a cash bonus to each of its employees and records the bonuses as compensation expense. Miller has reached a point as which it is now making a reasonable return on its shareholders' equity. At the end of the current year, the president of the company is considering doing away with the cash bonuses paid to each employee and instead establishing a compensatory stock option plan for its key executives. As this time, the market price and the planned option (exercise price) of the company's stock are the same. It is expected the stock price will continue to rise. The plan would allocate a specified number of options to each executive based on the executive's level within the company. The options can only be exercised after 3 years (service years of the key execs) and the options would have to be exercised within 10 years or they expire. The company anticipates a low 10% of the options will be forfeited You are the controller for Miller Corporation and you are also a key executive who can participate in this new plan. You also own a substantial number of Miller's common stock. Miller's president comes to you for advice about this plan and tells you that he/she believes that if the company establishes this compensatory stock option plan, it will workout for all of us key executives. The option pricing model shows a high fair value for each option. The corporation will be saving cash from not having to pay employee bonuses to either key execs or other employees. Because the market price and the exercise price on the grant date are the same, there won't be any compensation cost or expense related to this plan. In addition, since no cash bonuses will be paid this will lower compensation expense and increase the company's net income and earnings per share and its return on stockholders' equity compared to the prion year. This will increase the stock price. This seems like a no-brainer for the company. "Tm right? correct?", says the president of the company Required: Do you think Miller Corporation should adopt the compensatory stock option plan? As part of your answer, please address the financial reporting issues during each of the 3 service years, and the ethical issues (provide at least 2 ethical issues and discuss them in depth) You're welcome to create a numerical example as part of your answer(s) but it is not requiredExplanation / Answer
Accounting issues:
International accounting standards require companies to undertake fair valuation of ESOPs when quantifying ESOPs expense amount, while in the case of Indian GAAP (generally accepted accounting principles) there exists an option to either account for ESOPs expense as: (i) the amount by which the market price/ value of underlying share exceeds exercise price, or (ii) undertake fair valuation of ESOPs.
Providing for ESOPs as expense has a significant impact on the determination of distributable profits for dividend declaration, calculation of EPS (earnings per share), determination of profits for senior management remuneration, and payment of MAT (minimum alternate tax).
Othewise the companies will have to face the tax issues and some remarks on not maintaining the accounts for ESOP properly.
Ethical isse,fj
In this we can also find some ethical issues, employees who were getting the bonuses one time now they get shares under ESOP. But here there is a catch, i.e. for next three years they were not be given any bonus as such, they will be given only one time shares which they tell is ti expected to grow. But if that doesn’t grow then there will be loss for employees. Because the employeeswere getting money once, but now for atleat 3 years they will not get any thing apart from these