Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

Adjustment of allocation plans for stock-based compensation
costs*
Kinue Mohri
Faculty of Economics, Takasaki University of Economics
Japan Accounting Association
E-mail: kinue2014@tcue.ac.jp
Abstract
Prior research has considered accounting for stock options based on the idea that stock
options require recognition of the costs associated with the consumption of labor services. This
study uses normative and descriptive research to consider the logical necessity of accounting
in the revision phase of plans for the allocation of stock-based compensation costs. Because
revision of numbers to actual amounts is also performed in other fields of accounting, thenumber of stock options granted will be adjusted even when there are no specific modifications.
We also discuss the modification of allocation plans (without specifying whether thecorresponding account of the cost is a liability or equity), using allocation procedures in otherfields of accounting. We found that in revising allocation plans for stock-based compensation,a revision procedure (accounting for adjusting the numbers of stock options granted) similar
to that of the current standards can be considered as the widely accepted theory. Remeasuring
at fair value of stock options at each reporting date is not a nontrivial solution for revision
procedure (accounting for modification). Also, the procedure for modifying the allocation planfor stock-based compensation (accounting for adjusting the number and modification),
regardless of whether the corresponding account of costs is a liability or equity, can be a
powerful theory.
Keywords: stock options; allocation plans; stock-based compensation costs; the numbers ofstock options granted; modification(1) Introduction

allocation of stock-based compensation costs

This study uses normative and descriptive(accounting for adjusting the number of stock

research to consider the logical necessity ofoptions and modification). All major global

accounting in the revision of plans for theaccounting standards, including the JapaneseThis paper is part of the research results supportedby the JSPS Grant-in-Aid for Scientific Research(Early Career Scientists: Research Project No.
20K13640) and the 2020 Takasaki City University of

Economics Special Research Grant. I would like tothank Editage (www.editage.com) for English
language editing.

*17

Journal of Japanese Management Vol.5, No.2, May 2021

generally

acceptedpracticesconditions. Modification of conditions refers to(JGAAP) set by the Accounting Standards“a change in the terms or conditions of a share-

Board of Japan (ASBJ), call for the provision of

based payment award.” (FASB ASC, para. 718-

useful information for decision making by

20-20). This paper utilizes normative andstakeholders (subsequent facts that can alter

descriptive research to examine the revision of

investment expectations) as the purpose of

allocation plans for stock-compensation costs,

financial reporting (ASBJ, 2006, Section 1 paras.

which has not been always considered in prior

1-3;

studies 1 . Therefore, this study examines the

ASBJ

2005a,

accounting

ISSN 2189-9592

paras.1-3).

Thus,

in

accordance with the matching principle, thefollowing points:

principle of cost allocation is used to calculate

What is the basic idea behind thethe profit for a period.

revision of number of stock options

For stock options, prior international
researchhas

generally

considered

granted to the actual

theirnumbers

common to the current standards?

accounting treatment based on the idea that

Is it self-evident that each year thesecost recognition for labor service consumption isestimates are updated to reflect therequired (Mohri, 2013). Additionally, major

passage of time and the changes inaccounting standards authorities, such as theestimates

International Accounting Standards Board

modifications to the terms and(IASB) and the Financial Accounting Standards

conditions

Board (FASB), have stipulated that recognition

appreciation rights were granted? (Isof stock-based compensation costs is an

it self-evident that at the point theobjective of these standards. Accordingly,

corresponding account of a cost

recognition (cost allocation) of stock-based

becomes a financial liability, thecompensation costs can be understood as aprocedure for adjusting the allocation

central issue in the discussion of accounting forplan becomes remeasuring at fairstock options.

value of stock options at each

However, regarding this cost allocation,inonaccounting
which

for
stock

reporting date?)

there is a need for revisions to be made as

When adjusting plans for stock-based

predictions and estimates are revised, as withcompensation costs, is it preferable toextraordinary depreciation of tangible fixed

use remeasuring at fair value of stock

assets (ASBJ 2005a, 36；FASB ASC, para. 250-

options at each reporting date for

10-45-20).

exchange of old stock options for new

In

the

case

of

stock-based

compensation, the allocation plan may need tostock

be revised to reflect changes in the number ofinvestment

allocated stocks due to reasons such as mid-according to FASB ASC Topic 718-30,

term retirement and modifications of theor to adjusting allocation plans

1 Empirical and analytical studies have been conducted

optionsand(liquidationofreinvestment)

the modification of conditions for the per unit fair value(particularly, downward revision of the per unit fair value).
For further details, refer to Section 4.5.2.

on the revision of allocation plans for stock-based
compensation costs. In particular, in empirical studies byBrenner et al. (2000) and Acharya et al. (2000), examined18

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

according to ASBJ (2005b b; 2005c)

assets (Paton and Littleton, 1940, p.25; Ueno,

and the IASB (2016) (continuance of

1985, pp. 135-136).

investment)?
1.2. Processes relating to the adjustment of cost(2) Reviewing the current standard for stock-

allocation plans

based compensation – Where the issues lie

While the cost allocation approach applies
regular allocation under the current standard

1. Processes related to the adjustment of generalfor stock options (e.g., the straight-line method

allocation plans

is applied to depreciable assets), there are in

1.1. Cost allocation procedures

general 2 three techniques for revision of

The shared objective of financial reporting

forecasts and estimates: (a) the retrospective

in major standards is to provide usefulapproach, (b) the prospective approach, and (c)information for stakeholder decision-making

the catch-up approach（FASB 2000, paras. 89-(i.e., that expectations placed on an investment

100. In (a), costs are adjusted retrospectively,

have shifted after the fact) (ASBJ 2005a, paras.

leading to revision to costs made in all previous

1-3; ASBJ, 2006, Chapter 1, paras. 1-3).

periods. In (b), all revisions to costs are made in

Accordingly, the period profit calculation

the current period and thus, are recorded

examines whether inputs of goods and services

immediately and in full. In (c), the revised value

lead to the expected production of goods andis allocated across the remaining allocation

services by comparing costs and revenues inperiod（FASB 2000, paras. 89-100.

each period (Nakajima 1979, p. 119; Paton andLittleton, 1940, p.15). This is the matching2.

Current

standards

forstock-based

principle. This principle is characterized as acompensation

principle for the calculation of cost because it

2.1. Provisions for adjusting stock-option

determines costs for a period of time based onallocation plans

their correspondence with revenue (which is an

The treatment of the above estimates

independent variable assumed to be exchanged

during revision of stock options is largely thewith a third party independent of the company)

same under the ASBJ (2005b; 2005c) and the(Morita, 1969, p. 40; Ueno, 1985, p. 139).

IASB (2016). Specifically, first, as in other fields

This case uses the cost allocation principle.

of accounting, any deviation in the number ofWhen calculating profits for a period of time, tostock options granted from the actual number isshow gradual consumption through a firm's

required to be corrected to the actual value, andproduction activities, not all costs (cash flow or

so total cost is revised in accordance with

CF values) are recognized as costs immediatelychanges in quantity ex post（ASBJ 2005b, para.

at the time of input of goods and services; in fact,

7 (2) and 51-53；ASBJ 2005c, p. 3；IASB 2016,

current expenditures are recognized as costs

paras. IN5 (c) and 19-20). Second, excluding

while unrealized expenditures are deferred as

their forfeiture due to non-satisfying of thevesting conditions, regardless of any change in

For this framework, I refer to the discussion on
adjustment of allocation plans by present value

calculation in FASB (2000, paras. 89-100), following
Kawamura (2001, 143-148).

2

19

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

the modification and cancellation or liquidation

revision and confirms the adjustment ofof stock options, at a minimum, labor services

allocation plans for stock-based compensation(and their costs) must be recognized andcosts under the current standards.

measured at the fair value of the stock option asof the grant date（ASBJ 2005b, paras. 55-56；

Table 1 International comparison of accounting

ASBJ 2005c, pp. 4-5；IASB 2016, paras. IN5 (e)treatment for modification of conditions
Stock
Stock
Options
Appreciation
RightsFASB ASC(c) Stock options and stock
appreciation rights, new andexisting, are both processed
as exchanges of stock-based
compensation. However, thestandard finds that no
special stipulations areneeded
for
(b)
stock
appreciation rights, since
they are remeasured at theirfair value at each reporting
date, the same as in IFRS.
IFRS(a) Processed (b) N/A¹
by the catch- (Remeasured
up method, at fair value
except where ateach
the per unit reportingfairvalue date)
has
JGAAP
N/A²
decreased.
1. In IASB (2016), no treatment is stipulated forand BC2373. Then, except in cases where theunit price has depreciated, the catch-up
approach shall be used (ASBJ 2005b, paras. 1012 and 55-57；ASBJ 2005c, pp. 4-5；IASB 2016,
paras. IN5 (e) and BC 237). However, while
similar to these provisions, the FASB ASC (para.
718-20-35-6) considers the fundamental idea tobe the exchange of new stock options for old(original) stock options.
2.2. Provisions for adjusting allocation plans
involving SARs
SARs share a commonality with stock
options, as first, the total cost of SARs is revised
according to ex post changes (actual value) in
the number of SARs (IASB 2016, para. 33；
FASB ASC, para.7 18-30-35-1 through 3).
However, there is no provision for modifications

the case where conditions are modified

to the conditions in which stock options wereconsidering stock appreciation rights.

granted under IASB (2016). This is because for

2. In Japanese accounting standards, there is no

SARs, remeasuring at fair value of stock options

stipulation whatsoever about stock appreciation

at each reporting date was originally reflectedrights.

in the value of the stock-based compensation
cost, and hence, it is understood that no special

Within this, revisions to the numbers of

guidance is required when modifying conditions.

stock options (except for modification) grantedThis too is described in FASB ASC (para. 718-

are required to be revised to actual values for

30-35-5).

both stock options and SARs with any current
standards (ASBJ 2005b, paras. 7 (2) and 51-53；

3. The locus of the issue

ASBJ 2005c, p. 3；IASB 2016, paras. IN5 (c), 19-This section summarizes general cost

20, and 33). However, when conditions areallocation plans and the approaches of theirmodified, (a) under ASBJ (2005b, paras.55-56)

3A change in the conditions of stock options is “an ex-post

option, the number of stock options, or the period overwhich the rational cost is recorded” (ASBJ, 2005, para.
2(15)).

change in the conditions of allocated stock options, with
the intention of changing the fair unit price of the stock20

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

and IASB (2016, paras. IN5 (e) and BC237), thelabor contract, exchanging labor services forcatch-up approach is adopted for accounting for“stock option (with incentive conditions)” (ASBJ

stock options, except for downward adjustment

2005b, para. 64；ASBJ 2005c, p.3), and a specificof the per unit fair value of the stock option

exercise date during the exercise period isgranted;requiresdetermined from the position of the option

remeasuring at fair value of stock options at

holder as an investor (speculation) rather thaneach reporting date even where there is noas that of an employee. In such cases, changes

adjustment to the allocation plan, there are noin stock prices accompanying the provision ofprovisions for modifications to the terms andadditional labor services will not affect the total

conditions on which SARs were granted.

cost. Therefore, stock-based compensation costs

Moreover, (c) for FASB ASC (para. 718-20-35-5

can be regularly allocated with the consumption

and 6), this is interpreted as an exchange forof labor services.

and

(b)

since

SAR

new stock-based compensations, for both stock

Here, I confirm the characteristics of stock-

options and SARs.

based compensation cost allocation procedures.

Thus, this paper addresses the above-

First, while CF backing is present under

mentioned research questions.

conventional cost allocation, a characteristic
particular to the allocation procedure for stock(3) The treatment of forfeiture when the vesting

options-related cost is that no cash expenditure

conditions are not satisfied

occurs in a series of transactions. Opinions are,

1. The characteristics of the debate surrounding

therefore, divided as to the date of the stock

stock-based compensation

option value (or value of labor services) that

Under major current standards, stock

should be taken as the total allocation value.

option-related costs are regularly amortized

Second, the results expected from the(ASBJ 2005b, para. 4；ASBJ 2005c, p. 2). Thisagreement of a stock-based compensation

is because, in general, costs associated with

contract are not changes in stock prices (i.e.

intangible assets, labor services (general

financial investment) but rather the acquisitioncompensation

retirementof CF (i.e. business investment) from thebenefit costs), and unobservable assets such ascompany's autonomous business efforts using

goodwillsuch compensation plans. Therefore, stockarecosts,

includingregularly

allocatedusing

depreciation (AICPA 1970a, para.90 ；AICPA

option-related

1970b, paras. 21-23, and 27-31；FASB ASC,

compensation transactions, to correspond topara. 350-30-35-6). However, since stock option

revenues in each period (rather than theis incentive compensation, if common sense

immediately record of their full value) can be

carries the idea that assets should increase inderived as costs accompanying labor service

accordance with the additional labor services

expenditures (Paton and Littleton 1940, p. 15).

provided through this grant, then regularamortization

can

be

interpretedasaninappropriate means of handling stock optionsrelated costs (Balsam 1994, 59). However, on the
grant date, the contracting parties agree on a21

costs,

aswithgeneralJournal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

2. Changes in the number of stock optionof labor services and the value of the stock

granted after the grant date: The handling ofoption are equivalent on the grant date, andforfeiture when the vesting conditions are notchanges in the stock price and in numbers aftersatisfied.

the grant date can be interpreted as unrelated

As stated, this cost allocation may beto the total cost4.

required to be adjusted when estimates are

However, if the number of grants is used forrevised (FASB ASC, para. 250-10-45-20). The

determining the amount of the cost, and where

firststock-based

the cost continues to be recorded withoutcompensation cost allocation plan is to reflectreflecting mid-term retirement, that total costchanges in ex-post quantity in the allocation

can be interpreted as having deviated from theplan (ASBJ 2005b, para. 7 (2) and paras. 51-53；

true value. In other areas of accounting, since

ASBJ 2005c, p. 3. This is because stock options

adjustment to the actual number of stock

are generally granted to multiple employees,

options is generally required where deviationsome of whom may leave the company in thefrom the true value occurs, even if the total

middle of the vesting period or fail to meet thevalue of stock-based compensation costs isvesting conditions. Therefore, even where themeasured on the grant date, the total cost may

number of vested stock options is estimatedbe revised in accordance with ex-post changes infrom the starting grant date, the numbers,

the numbers (ASBJ 2005b, paras. 7 (2) and 51-

including that of employees, may change the53；ASBJ 2005c, p. 3）.

adjustment

to

the

fact of de fact (ASBJ 2005b, paras. 7 (2) and 51-

There are three specific measurements of

53; ASBJ 2005c, p. 3. However, the event occurs

cost. First, the following accounting treatment

after the recording of cost has begun. Therefore,

can be derived based on the retrospective

a debate has arisen in accounting as to whether

approach.

changes in the number should be reflected ex-

employees as compensation (compensation forpost in the total stock-based compensation costlabor delivering shares in the future). However,(amount of cost per employee multiplied bystock options will have value as a reward only

number of employees), and if it is to be reflected,

after the vesting conditions are satisfied.

at which point in time this is to be done.

Accordingly, stock options are not consideredstock

optionsaregrantedtoFirst, the view that changes in the number

commensurable to the value of labor servicesof stock options after the grant date should not

where their conditions are not vested. Therefore,be allocated at all is based on the following idea.

in accounting, the value of stock-based

On the grant date, the parties to the contract arecompensation costs can be recorded using theconsidered to have entered into an economically

number of vested or exercised stock options, andequivalate transaction (including the possibility

when forfeiture occurs, it is possible to adjustof leaving the company partway through or

retroactively the costs recorded previously toforfeiture the conditions)（ASBJ 2005b, paras.

conform to the actual value.

44 and 49-50; ASBJ 2005c, p. 2. Thus, the value
4However, the method of calculating the cost using thenumber of expected rights vested at the grant date is not
rejected.

22

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

However, even if a stock option does not

Continuing the previous allocation plan

exercise due to forfeiture when the vesting

when this modification occurs, the allocation of

conditions are not satisfied, it is undisputed thatstock-based compensation costs over the period

the company received and consumed labor

will deviate from the actual situation of stock-

services. In such cases, that fact which occurred

based compensation. Hence, if a change is madein the past, should be faithfully recognized as ato the conditions, a revision of the allocation

cost and even if the conditions are not vested inplan will be required.

the future, should not be revised easily. In

Contrary to stock options where the current

accordance with this idea, when changes instandards explicitly are required when applying

numbers of stock options occur after the grants

to alter conditions, there is no requirement inof stock options, the value of cost recorded in theapplying to SARs when conditions are modified.

past is not retroactively revised. However, anThis may be related to the fact that

accounting treatment (prospective approach orremeasuring at a fair value of stock options atcatch-up approach) can be derived to revise theeach reporting date is performed for SARs

amount of costs in the period in which an(FASB ASC, para.718-30-35-1 through 3).

unforeseen event occurs or thereafter (ASBJ

Several studies on accounting treatments for2005b, paras. 7 (2) and 51-53；ASBJ 2005c, p.

stock options, such as Balsam (1994), consider3). Current standards have adopted theaccountingforprospective approach to reflect that laboraccountingforservices have been received and consumed intransactions (transactions of SAR). I, therefore,

financial statements.

discuss whether remeasuring at fair value ofstock

optionsreconciling

economicallyequivalent

stock options at each reporting date can be a(4) Consideration of accounting treatments formodifyingtheconditionsofpowerful theory when terms are altered.

stock-based

compensation

2. Accounting treatments 1: Adjustment of

1. Modification of stock-based compensation

allocation plans based on remeasuring at fair

In response to changes in numbers thatvalue of stock options at each reporting date

may occur even where the above allocation plan

2.1. The rationale for remeasuring at fair value

proceeds

successfully,forstock-basedof stock options at each reporting date for SARs

vesting

conditions

Even in many practical works, stock option

established on the grant date may be modified

is said to be a type of incentive compensation. In

to improve employees’ motivation to work

such cases, it is also understood that the(ASBJ 2005b, para. 54；IASB 2016, paras. 26

increase in costs should be recognized using

and BC222). For example, since the incentive toproxy values such as stock prices to represent

work is largely reduced where the stock pricethe provision of additional labor services

falls sharply after the grant date and theaccompanying the grant of stock options

probability of the exercising of these options(Balsam 1994, 59). Behind this lies the idea that

decreases, the exercise price can be reduced tochanges in the value of labor services are linked

rectify this (ASBJ, 2005,b para. 54; IASB 2016,

to changes in stock prices.

compensation,

theparas. 26 and BC222).
23

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

2.2. A logic for revising allocation plans throughto manipulate prices through its own sales

continuous mark-to-market valuation

efforts even if there is no guarantee that a

Under accounting standards for SAR,

transaction will be concluded (Yoneyama, 2003,

stock-based compensation is a type of incentive

pp. 65-66; ASBJ 2008, paras. 11 and 51).

compensation, and changes in the value of labor

Therefore, it is understood that the numbers areservices are regarded as linked to changes inadjusted to the true value when the acquisition

proxy values such as stock price (IASB 2016,

cost is deferred, and the inventory has been soldpara. 33 ； FASB ASC, para. 718-30-35-3).

(when the physical use and benefit has

Following the above, because the total amountcompletely expired) (ASBJ 2008, para. 41).

ofstock-based

compensation

costs

is

However,thecurrent

standards

forremeasured at fair value of stock options at each

inventories in many countries use the lower ofreporting date, it can be understood that if athe cost or market method, and when per unit

modification takes place, no special guidance forprices fall due to damage or reduced quality, or

the adjustment of allocation plans is required atwhen numbers are reduced due to theft or otherthe date of the modification if the adjustment isreasons, book values are often adjusted tomade using fair values (FASB ASC, para. 718-

match market value (Paton and Littleton 1940,

30-35-5).

pp. 79-81; ASBJ 2008, paras, 36-37；Yoneyama,
2003, p. 71). Therefore, I review adjustments

2.3. An argument for business investments(that previous studies have yet to examine per(inventories) that refer to market value but do

unit

not use fair value

environmental changes occur in inventories.

costs)

toallocation

plans

when

As noted above, stock-based compensation

For inventories, when the market value nois granted as a consideration for labor services

longer reaches the book value (e.g., where the(as part of business investment). Conversely, thevalue has fallen due to market valuation or

accounting treatment obtained in the previous

physical damage), a procedure is applied tosectionreduce the book value according to market value

isgenerally

used

for

financial(Paton and Littleton 1940, pp. 79-81；Yoneyama,

investments.
to2003, p. 71；ASBJ 2008, para. 37). From theallocation plans about inventory transactions

asset and liability view, this is primarily done tothat refer to market value, out of businesspreserve the recoverability of the book value ofinvestments.

on

the items shown on the balance sheet, while if

investment in inventory, as with financial

examined from the revenue and expense view, it

instruments, is to achieve greater results by

is to correctly calculate profit and loss for the

selling inventory on the marketplace (Paton andperiod following the adjustment of the allocation

Littleton 1940, p. 81；ASBJ 2008, para. 37).

plan (Yoneyama, 2003, pp. 75-76 and 79-80).

Therefore,

Inventories

I

The

are

confirm

adjustments

expectation

the

same

placedasfinancial

In such cases, even if the transaction

instruments as they are held for the purpose ofemphasizes the market value, there will be nosale. However, since they are sold on a variety of

remeasuring at fair value of stock options at

markets with different dynamics, market

each reporting date (particularly the upward

players, and expectations, the company is able

revision of prices per unit). Accordingly, stock24

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

options—a form of business investment—do not

1950, p. 106；Wyatt, 1963, p. 82). Thus, the net

invariably require adjustment of cost at each

assets of all the parties in the business

reporting date, even if the corresponding

combination are recognized at fair value as theaccount for stock-based compensation cost is a

starting point of the “new” company, since theliability.

company

emerging

from

the

business

combination is expected to have changed
3. Accounting method 2: The exchange of old

substantially from the company prior to thestock options for new stock options

business combination (Wilcox 1950, p. 106 ；3.1. Provisions for altering in conditions of stock

Wyatt, 1963, p. 82). Within the fresh-start

option-related costs under US standard

method, this is the concept of fair value pooling.

Next, I consider the modifications in

Following this discussion, if labor services

conditions of stock option under FASB ASC as

are received based on new stock options withantreatment.

new vesting conditions, those labor services canSpecifically, the FASB ASC is the same as thealso be interpreted as being different from those

ASBJ (2005) and IASB (2016) because, at aprevious, and stock-based compensation cost

minimum,

theirmust be allocated over the period on a new

consumption) must be recognized as measured

accounting basis (allocation plan). In such cases,at the fair value on the grant date of the stockeven if the total allocation of stock-based

option, regardless of any modification or thecompensation costs is revised downward fromcancellation or liquidation of the stock option

the previous allocation, a new allocation of

grant (excluding forfeiture when the vesting

stock-based compensation costs is made for theconditions are not satisfied). Further, FASB

period based on the total allocation; this would

ASC treats a change in conditions as an

be a remeasurement made using the fair value

exchange of a new stock option for the originalon the date of the modification (either stock

stock option. Below, I consider the significanceoption or labor services, whichever is moreof this exchange.

reliable). In other words, this is the catch-up

alternative

accounting

laborservices(andapproach.
3.2. Liquidation of investment and mimicking
reinvestment: In relation to the fresh-start

3.3. Accounting method 3: Continuance of

method (fair value pooling) for business

investment at the date of the modification (thecombinations

logic of current standards)

First, I can derive the idea that exchanging

Conversely, the current standards can be

new stock options for the original stock options

interpreted as being based on the idea that

leads to the liquidation of, and subsequent

investment continues even if stock options are

reinvestment

made.

exchanged. This can be confirmed using a

Moreover, fresh-start method for businessbusiness combination through an exchange ofcombinations is similar to this idea because thestocks (pooling-of-interests method) (AICPA

fresh-startbusiness

1970a, para. 12), as in a business combination by

combinations to liquidate the previous control

exchange of stocks (between a surviving

relationship and create a new company (Wilcox

company and the dissolving company), the

in,

the

methodinvestment

considers25Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

surviving company acquires all the stocks of the

4. Adjustment of allocation plan for stock-based

dissolving company in exchange for its own

compensation costs based on the logic ofstocks. The stockholders of the dissolving

amortizable assets

company become stockholders of the surviving

4.1.

company, enjoying the risks and returns of theunobservable assets

combined company (AIA 1950, paras. 2-3 ；Generally,

Procedures

for

the

the

costs

allocation
associated

of
with

AICPA 1970a, para. 28；Coleman 1970, 96).

unobservable assets such as intangible assets,

Accordingly, it can be interpreted that even if alabor services (general compensation tractions,share exchange is conducted between the

including retirement benefit costs), and goodwill

surviving company and the dissolving company,

are allocated regularly using this depreciation

the expectation for the investment remains(AICPA 1970a, para.90；AICPA 1970b, paras.

unchanged, and the company for which

21-23, and 27-31；FASB ASC, para.350-30-35-

expectations are unchanged survives (AIA 1950,

6). The expected outcome of holding thesepara.5; AIA 1957, para.9; AICPA 1970a, paras.

unobservable assets is the acquisition of CF

12 and 28).

from the company’s own business efforts using

Applying this to transactions for stock

those assets (ASBJ 2005a, para. 60; ASBJ 2006,

options yields the following: in a business

Chapter 4, para.57).

combination through the exchange of oldphysical utility of this type of asset is(original) stock options for new stock options,

understoodthe new stock options acquire all the employees’

eventually be entirely consumed. To reflect thislabor services in exchange for the old stockin accounting treatments, the current standard

options (where the per unit price of the newrequires regular amortization corresponding tostock options is higher than that of the old stockearnings in a given period (FASB ASC paras.

options), and so the old stock options enjoy the350-30-35-1 and 2).

toCorrespondingly, thegradually

decreaseandreceipt and consumption of the labor services
accompanying the allocation of the new stock

4.2. Accounting treatment for modification

options. In such cases, even if the old stock

under Japanese and international financial

options are exchanged for new ones, theaccounting standards

expectations placed on an investment are

So, what would be the process for adjusting

unchanged and can be interpreted as athis allocation plan under current standards?

continuance of stock option investment withAs stated, the ASBJ (2005b, paras.10-12 andexpectations remaining unchanged. Therefore,

paras. 55-56) and the IASB (2016, paras. IN5 (e)the exchange of old stock options for new stock

and BC237) are broadly similar in theiroptions may be viewed as similar to atreatmentofmodification under ASBJ (2005) and IASB

(excluding

forfeiture(2016).

conditions are not satisfied) regardless of amodification.
when

Specificallythevesting

Based on this idea, the next section

modification, or the cancellation or liquidation

analyzes the logical necessity of accounting forof the stock options, at a minimum, labor

modification (where we assume investment isservices must be recognized measured at faircontinued).

value on the grant date (ASBJ 2005b, paras. 5526

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

56; ASBJ 2005c, pp. 4-5). The following revision

revising estimates of depreciable assets could

procedure (excluding situations where the peralso serve for the revision of allocation plans.

unit price has fallen; this is addressed using the

There are broadly two types of revision

catch-up approach) is then performed (ASBJ

procedure: (a) a revision required where the2005b, paras. 10-12 and 55-57; ASBJ 2005c, pp. 4-

purpose for holding an asset does not change

5).

(shortening of useful life) (FASB ASC, paras.
First, regarding per unit price, the ASBJ

350-30-35-9 through 13), and (b) a revision(2005, paras. 10(1) and 55) requires that when arequired where the purpose for holding an asset

per unit price is adjusted due to a modification,is changed (impairment) (Yoneyama, 1999, p.

the previous allocation plan of stock options be380). To anticipate the conclusion, it is believed

continued for upward adjustments, and thethat stock-based compensation does not alignincrease due to the modification be recorded aswith procedure (b) because, as with retirement

additional per unit price multiply by thebenefits, even if the estimate is revised, thenumber of stock options. In cases of downward

expectation that compensation (equivalentrevision, no special revision procedure is used,value) will be paid to employees in return for theand the previous allocation procedure willlabor services received from employees does notcontinue (ASBJ, 2005b, para. 10(2); ASBJ 2005c,

change (Yoneyama, 1999, pp. 380-381; FASB

p. 4 ； IASB 2016, para. B44(a)). Second, aASC, para. 250-10-45-20). Based on this idea, I

modification leading to an adjustment of theanalyze revision procedure (a).

numbers of stock options granted can beinterpreted as having been performed with the

4.4. Adjustment of allocation plans (allocation

expectation of an effect in the future, and so theperiods) stock-based compensation cost based

original allocation plan is continued, with theon the logic of amortizable assets

revised amount reflected over the remaining

In an allocation plan for amortizable assets,

period (ASBJ, 2005b, paras. 11 and 57; ASBJ(a) the observable acquisition cost (total cost of

2005b, 4; IASB, 2016, para. B43). Third, if theallocation plan) is allocated as cost using a

allocation period changes due to modification,mechanicalthe total amount of allocation plan anticipated(assumption), and the cost (depreciation) is

prior to the modification is recorded over therecorded in the income statement for eachnew remaining period (ASBJ, 2005b, para. 12;

period over its (c) useful life (allocation period)

ASBJ 2005b, pp. 4-5; IASB, 2016, paras. B43-

(AIA 1953, Chapter 9, para.5). In revising this44).

plan, it is necessary to consider adjustments of
the

and

allocation

regularperiod

in

(b)

(c),

patternandthe4.3. Adjustment of allocation plans where

accompanying adjustment of the allocation

expectations placed on the investment are

pattern in (b). This is because (for amortizable

unchanged

assets) the total amount of allocation plan in (a)As stated in 4.1, the logic of depreciation

does not need to be adjusted because it is CF

can be useful in analyzing the allocation ofthat has been spent and fixed in the past.

stock-based compensation costs over time. In

Therefore, I first consider the allocation period

such cases, discussion of the procedure for27

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

in (c) and associated adjustment of the

5. Adjustment of allocation plans (total amountallocation pattern in (b).

of allocation plan, i.e., per unit price andTraditionally, the allocation period (whennumber of stock options granted) for stock-

the physical utility of an amortizable asset isbased compensation costs based on the logic ofdepleted) is considered an estimable event, andretirement benefits

costs are allocated so that the book amount

Unlike in the case of amortizable assets, thereaches zero at the end of the allocation period

total amount of allocation plan is not fixed in(Yoneyama, 2003, pp. 9-16; FASB ASC, para.

transactions of stock options. The same is true250-10-45-20). Following this idea, if a revision

for SARs and retirement benefits, which areof the useful life estimate is required, the book

net-cash-settled stock-based compensation (AIA

amount will not reach zero at the end of the1956, para.4；AICPA 1966, paras. 11 and 13；IASB

allocation period if amortization continues to be2016, para. BC241). Nevertheless, in AIA (1956,

based on the original useful life (Yoneyama,para.

2003, p. 16). Therefore, the allocation period

determination of pension costs are not so greatmust be re-estimated, and the allocation

as to prevent cost allocation, and periodic

pattern be revised so that the book amount at

allocation of these costs is discussed.

4),

uncertainties

regardingthethe end of the new pattern of allocation becomes

Hence, the estimate can be revised even forzero (Yoneyama, 2003, p. 16; FASB ASC, para.

total amount of allocations where the allocation

250-10-45-20).

plan was not revised during the amortizable

Here, three more specific approaches can beassets phase. Generally, the total amount ofconsidered. However, a company intentionallyallocation plan (acquisition cost) is calculated asalters the initial vesting conditions at the date“per unit price multiply by number (number ofof the modification. Thus, the allocation plan is

employees)” (AICPA 1966, para. 2). Therefore,

believed to be correct up to the date of thecontinuing the discussion in the previous

modification.

section,

Therefore,theretrospective

takingretirement

benefits,aapproach, which revises the allocation plancompensation transaction for which the total

previously, can be rejected, and the prospective

amount of allocation is not fixed, this section

approach or the catch-up approach can be

discusses revisions to estimates of total

derived. Then, with the support of adjustment

allocation (per unit price and number).

of estimates (recognition of prior service costs
and actuarial gain or loss) for retirement

5.1.

benefits—discussed

retirement benefit

next—theprospective

Adjustmentofallocation

plans

for

approach can be used under the idea that theGenerally, although it may be assumed that

adjustment of the estimate should be recognized

the pension plans will continue indefinitely, the

as

the

most important rule to be observed in theconservatism), and the catch-up approach (anallocation procedure is that the total amount ofallocation period spanning the remaining

allocation reaches zero at the end of theallocation period) can be used if the modification

allocation period (AIA 1956, para.5；AICPA 1966,

leads to an increase in employees’ motivation topara. 12；FASB ASC, para. 250-10-45-20). Thus,

swiftlyaspossible(basedonwork in the future.
28

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

if not only the allocation period5 but also theWith regard to numbers of stock options, as set

total amount of allocation is adjusted, theout in Section (3), and not limited torevision to the estimate is reflected in themodifications, any deviation between the

periodic profit and loss as actuarial gain or loss

number set during allocation planning and the(AICPA 1966, para. 25 and Appendix A).

actual number of stock options requires revision

Moreover, where adjustment is made to theto reflect the actual amounts, and so the total

levelamount of allocation may be revised to adjustofretirement

benefitsimilartomodification, the amount of that adjustment

thewill be recorded as prior service cost (AICPA

accompanying modifications.

1966, para. 17). However, even based on thisassumption,

there

stock

options

grantedHere, following Section 3, there are three
specific approaches of adjustment. However, adetermined accounting process, and as withcompany intentionally alters the initial vesting

adjustments to the allocation period, this canconditions on the date of the modification. T

lead to the prospective approach (delayed

recognizes that the allocation plan is correct up

recognition)

approachto the date of the modification. Thus, the(immediate recognition) (AICPA 1966, para. 47;

retrospective approach, which adjusts the

Yoneyama, 1999) 6.

previous allocation plan, can be rejected, and

the

no

of

unequivocally

and

is

numbercatch-up

Furthermore, adjustments of the allocation

the prospective approach or the catch-up

plan are required where retirement benefit

approach can be derived.

obligations (of equal value to the retirement
benefits allowance in this case) are reduced due

5.3. Adjustments to the per unit price of stock

to mid-term retirement (while maintaining a

options

separate allowance for each individual, as with

By contrast, how do we regard the per unit

stock-based compensation) (AIA 1956, para.8).

price of stock options? If, despite revising theSpecifically, in the case of general retirement,

estimate of total amount of allocation (total

the difference between the reduction in accrued

stock-based compensation costs), this fact is not

pension cost and the amount paid to employees

reflected in the periodic profit and loss, the book

(cash expenditure) is handled using theamount of stock-based compensation costs willprospective approach as a reversal of retirement

not reach zero at the end of the allocation period.

benefit costs. This can be interpreted as a

The per unit price within the total amount ofcorrection to the actual amount of the number,allocation can therefore be adjusted using theas in other fields of accounting.

three approaches described above. However,since a company intentionally alters the initial

5.2. Revisions to the number of stock options

vesting

conditions

on

the

date

of

the

I first analyze the number of stock option

modification and the allocation plan is assumed

based on the discussion in the previous section.

correct up to the date of the modification, theMoreover, in AIA (1956, para. 5), the candidate
allocation periods proposed for accounting treatment for
pension plans include the remaining service period for
eligible employees when the pension plan is adopted andthe total period of the pension plan and the plan thatsucceeds it (an unlimited period).
6 Moreover, FASB/ASC and the ASBJ (2016) require
deferred recognition, while IASB (2011) requires
immediate recognition.

529

Journal of Japanese Management Vol.5, No.2, May 2021

ISSN 2189-9592

retrospective approach, which adjusts thedone because it leads to rewarding employees

previous allocation plan, can be rejected, andfor poor performance, which in turn leads tothe prospective approach or the catch-up

signs of future financial difficulties or highapproach can be derived.

volatility (Acharya et al. 2000；Hume and Tokic

Then, with the support of revision to2005, 64 and 66). Moreover, IASB (2016, para.

estimates (recognition of past service costs andBC237) also points out that downward revision

actuarial differences) for retirement benefits,of the total amount of stock-based compensation

described later, the prospective approach can becosts must be allowed to prevent profit

used under the idea that the revision of themanipulation by modification of conditions.

estimate should be recognized as swiftly as

Correspondingly, the allocation plan can be

possible (based on a conservative approach),adjusted only in cases of maintenance of theand the catch-up approach (an allocation period

status quo or that of upward adjustment of thespanning the remaining allocation period) can

per unit price in the total amount of allocation

be used if the modification leads to an increasesame as ASBJ (2005b; 2005c) and IASB (2016).

in employees’ motivation to work in the future.
Here, under the current standards, there is(5) Conclusiona shared, asymmetric treatment of increases

The main conclusions are as follows:

and decreases in cost; that is, upward1.

Because adjustment of numbers to actualadjustment (increases) of per unit prices results

amounts is also performed in other fields ofin the recording of additional costs, while foraccounting, the number of stock option will

downward adjustment (decrease) of per unit

be adjusted even when there are no specificprice; existing costs are not reduced and periodic

modifications. The reason is that inallocation is carried out as before (ASBJ 2005b,

adjusting allocation plans of stock-basedp. 4). It has been argued that this is notcompensation

acceptable

stock-based

procedure similar to that of the current

compensation to be incentive compensation, as

standards can be considered as the widely

exemplified by Balsam (1994) and others.

accepted theory. However, in so doing, theHowever, using the logic of retirement benefits,

retrospective approach is not adopted, to

we discussion this point as follows.

faithfully represent the fact of the receipt

Since

consideringstock-based

compensation

is

are

made

to

destroyanadjustment

and consumption of labor services.

incentive compensation, modifications of suchcompensation

cost,

2.

Even if the corresponding account for thethecost is a liability, adjustment using

incentives that exist in the original contract andremeasuring at fair value of stock options

to increase the employees’ motivation to work in

at each reporting date is not self-evident.

the future (Brenner et al. 2000；Hume and Tokic

3.

In IASB (2016), accounting treatment for

2005, 63) 7 . In such cases, a downward

modification for stock appreciation rights

adjustment of total stock-based compensationthat is not self-evident as described in 2, iscost during modification should not generally be

stipulated so that it is self-evident.

In Gilson and Vetsuypens (1993), rights-holders weresaid to prefer stock option price revisions as they reduced

the incentive for taking on high-risk projects in an effort
to increase shares.

730

Journal of Japanese Management Vol.5, No.2, May 2021

Moreover,accounting

FASB

ASC

treatment

stipulates
byanISSN 2189-9592

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33