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price has been xed in which to enroll in the plan, and (b) the purchase price is ased solely on the stock s market price at the date of purchase and employees are permitted to cancel participation before the purchase date 2 The discount from the market price is ve percent or less (or the company is able to justify a higher discount) 3 Substantially all full-time employees meeting limited employment quali cations may participate on an equitable basis (l) LOOK-BACK OPTIONS Some companies offer options to employees under Section 423 of the Internal Revenue Code, which allows employees to defer taxation on the difference between the market price of the stock and a discounted purchase price if certain requirements are met One requirement is that the option price may not be less than the smaller of (a) 85 percent of the market price when the option is granted or (b) 85 percent of the market price at exercise date Options that provide for the more favorable of several exercise prices are referred to as lookback options Under APB Opinion No 25, Section 423 look-back plans generally are considered noncompensatory Under the FASB Statement No 123, the effect of a look-back feature would be recorded at fair value at the grant date similar to other stock-based compensation Accordingly, the fair value of a look-back option should be estimated based on the stock price and terms of the option at the grant date by breaking it into its components and valuing the option as a combination position For example, on January 1, 2004, a company offers its employees the opportunity to sign up for payroll deductions to purchase its stock at either 85 percent of the stock s current $50 price or 85 percent of the stock price at the end of the year when the options expire, whichever is lower Assume that the dividend yield is zero, expected volatility is 35 percent, and the risk-free interest rate available for the next 12 months is 7 percent The look-back option consists of 15 percent of a share of nonvested stock and 85 percent of a one-year call option The underlying logic is that the holder of the look-back option will always receive 15 percent of a share of stock upon exercise, regardless of the stock price at that date For.

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Emerging Issues Task Force Issue No 87 33, Stock Compensation Issues Related to Market Decline This consensus addresses a number of issues related to the October 1987 stock market decline, including How to account for the repurchase of an outstanding option and the issuance of a new option The Task Force consensus on this issue was that paragraph 11(g) of APB Opinion No 25 does not apply if an existing option is repurchased in contemplation of the issuance of a new option that contains terms identical to the remaining terms of the original option except that the exercise price is reduced The consensus also indicates that the cash paid to repurchase the original option represents additional compensation that should be charged to expense in the current period The effect of this consensus is to preclude an employer from decreasing compensation cost associated with a stock option award, by settling the award through a cash payment that is less than the amount of compensation cost previously determined, and then granting a new option to the same employee that contains terms identical to the remaining terms of the original option except that the exercise price is reduced In the event such an arrangement were entered into, application of the consensus would (1) require the employer to charge the amount of the cash payment to expense in the current period, (2) prohibit the reversal of previously recognized expense associated with the original option, and (3) require continued amortization of any compensation measured at the original measurement date that had not been amortized and, additionally, could result in the measurement of additional compensation expense associated with the new award The consensus also requires similar accounting when an option is repriced, as opposed to the situation described above where an option is canceled and reissued Emerging Issues Task Force Issue No 88 6, Book Value Stock Plans in an Initial Public Offering As previously noted, EITF Issue No 87 23 addresses certain issues related to the accounting for stock purchase awards to employees, where the purchase price is a formula price based on book value or earnings, and where the shares must ultimately be sold back to the company by the employee at a price determined in the same manner as the original purchase price The consensus set forth in EITF Issue No 87 23 makes certain distinctions between privately and publicly held companies with respect to the accounting for these types of awards In EITF Issue No 88 6, the Task Force reached a consensus that a book value stock purchase plan of a ublicly held company should be viewed as a performance plan and should be accounted for like an SAR (this is consistent with the SEC observer s comment noted under the discussion of EITF Issue No 87 23 above) Thus, for a publicly held company, compensation expense should be recognized for increases in book value (or other formula price based on earnings) on awards outstanding under such a plan For a privately held company, however, under the consensus reached in EITF Issue No 87 23, no compensation expense would be recognized for such increases in the book value or other formula price, regardless of when the awards were granted The Task Force also reached consensuses in EITF Issue No 88 6 related to the recognition and measurement of compensation expense by a privately held company for such awards in the event of a subsequent IPO (ie, when a privately held company becomes a publicly held company) These consensuses are set forth in Exhibit 392 EITF Issue No 88 6 also contains certain guidance regarding pro forma disclosures for these types of plans in the event of an IPO, as well as an exhibit that contains Examples of the Application of APB Opinion No 25 and the EITF Consensus from Issue Nos 87 23 and 88 6 in an IPO Emerging Issues Task Force Issue No 94 6, Accounting for the Buyout of Compensatory Stock Options EITF Issue No 87 33 addressed the settling of options and the issuance of new options.

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