CS » Topics » Share-based compensation

This excerpt taken from the CS 20-F filed Mar 31, 2006.
Share-based compensation
Through December 31, 2002, the Group accounted for its employee share-based compensation program under the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Under APB 25, for shares granted as compensation in relation to the annual bonus that vested immediately upon grant, compensation expense was recognized in the applicable performance year in which the award was earned. For shares granted as retention incentive awards, compensation expense was recognized over the required service period on a straight-line basis. For share awards granted, compensation expense was measured based on the number of shares granted and the current market value of the share at the date of grant. No compensation expense was generally recognized for share options because they were granted with an exercise price greater than or equal to the market price at the date of grant.

Through December 31, 2004, the Group accounted for all equity-based compensation awards granted to employees and existing awards modified on or after January 1, 2003, at fair value in accordance with the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-based Compensation (SFAS 123) as amended by SFAS No. 148, Accounting for Stock-based Compensation – Transition and Disclosure – An Amendment of FASB Statement No. 123” (SFAS 148). Compensation expense was measured at the grant or modification date based on the fair value of the award and recognized in the consolidated statement of income over the required service period on a straight-line basis. Share options outstanding as of December 31, 2002, if not subsequently modified, continued to be accounted for under APB 25.

Effective January 1, 2005, the Group early adopted, using the modified prospective method, SFAS No. 123 (Revised 2004), “Accounting for Stock-based Compensation” (SFAS 123R). Under the modified prospective method for all share-based equity awards granted to employees and existing equity awards modified on or after January 1, 2005, compensation expense is measured at grant date or modification date based on the fair value of the number of awards for which the requisite service is expected to be rendered and is recognized in the consolidated statement of income over the required service period on a straight-line basis. For all outstanding unvested equity awards as of January 1, 2005, that were previously accounted for under APB 25, compensation expense is measured based on the original grant date fair value of the award and is recognized over the remaining requisite service period of each award on a straight-line basis.

Compensation costs for share-based equity awards with only a service condition that are subject to graded vesting are recognized on a straight-line basis over the service period for the entire award. Further, upon adoption of SFAS 123R, recognition of compensation costs is accelerated to the date an employee becomes eligible for retirement.

The Group has certain option plans outstanding, primarily related to the years 1999 and prior, which include a cash settlement feature. For those plans, liability award accounting will continue to be applied until settlement of the awards.

The following table presents net income and basic and diluted earnings per share as reported, and as if all outstanding awards were accounted for at fair value under SFAS 123. The company adopted SFAS 123R using the modified prospective method, and prior-year figures have not been restated.
Year ended December 31, in CHF m, except the per share amounts20042003
Net income - as reported5,628770
Add: share-based compensation expense included in reported net income/(loss), net of related tax effects702740
Deduct: total share-based compensation expense determined under the fair value method for all awards vested during the year, net of related tax effects(702)(761)
Net income - pro forma5,628749
Net income available for common shares for basic EPS - pro forma5,455727
Net income available for common shares for diluted EPS - pro forma5,744727
Basic earnings per share - as reported4.800.64
Basic earnings per share - pro forma4.800.62
Diluted earnings per share - as reported4.750.63
Diluted earnings per share - pro forma4.750.62

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