# Stock option & Pension questions

1. Calculation question: CEO Options (grant date January 1, 2006) Strike price \$37.00 Current market price \$35.00 Number of options 100,000 Option period 4 years Vesting period 25% per year Assume that the CEO of Gasline exercises 25,000 of his options on December 31, 2006, and the market price of the stock on that date is \$39.50. Calculate the total compensation expense for the year ending 2006 that Gasline should recognize in association with the CEO option grant. Answer is \$25,000 (= \$100,000 / 4 years). Where’s \$100,000 from? 2. What’s the effect of smoothing expense for pension by adjusting for unrecognized items & amortization items, besides smoothing the expense itself? Any impact on the leverage of the firm (eg: increase liability side through increase of PBO, ect?) 3. I’m trying to memorize this: Under current GAAP, in Balance sheet, there’s no adjustment for unrecognized items, but IFRS does. Under current GAAP, in Income statement, there’s still adjustment for unrecognized items, and same as IFRS. From CFA book, it introduces that US GAAP changed the rule from 2006, that balance sheet no longer adjust for unrecognize items to reflect the economic position of the pension plan. Why economic position here? Like the accrual method in accounting, accrual accounting reflects better the economic sense, hence shouldn’t the adjustment for deferred/unrecognized/amortized items reflect better economic sense (or position) for funded status?

for (1), i think you must be missing something. OPtion expense is based on the value of the option on the date of the grant (typically using a black scholes or binomial model). Based on your calculation, it looks like the option value = \$1?