Bank of America 2004 Annual Report Download - page 103

102 BANK OF AMERICA 2004
Service (IRS). Management is currently evaluating its opportunity to
make this election for 2005 and expects to complete its evaluation
after the release of detailed guidance, expected to occur by the third
quarter of 2005. In accordance with FSP No. 109-2, the special
deduction elective provision of the Act has not been considered in
determining the provision for deferred U.S. income taxes on unremit-
ted earnings of foreign subsidiaries. The range of unremitted earn-
ings that management is considering for the special deduction
election is $0 to $899 million, and the range of income tax effects
that could result from remitting earnings from certain foreign sub-
sidiaries that have been assumed to be permanently reinvested is
approximately $0 to $30 million.
Stock-based Compensation
SFAS No. 148, “Accounting for Stock-Based Compensation –
Transition and Disclosure – an amendment of FASB Statement
No. 123,” (SFAS 148) was adopted prospectively by the Corporation
on January 1, 2003. SFAS 148 provides alternative methods of tran-
sition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. All stock
options granted under plans before the adoption date will continue to
be accounted for under APB 25 unless these stock options are mod-
ified or settled subsequent to adoption. SFAS 148 was effective for
all stock option awards granted in 2003 and thereafter. Under APB
25, the Corporation accounted for stock options using the intrinsic
value method and no compensation expense was recognized, as the
grant price was equal to the strike price. Under the fair value method,
stock option compensation expense is measured on the date of grant
using an option-pricing model. The option-pricing model is based on
certain assumptions and changes to those assumptions may result
in different fair value estimates.
In accordance with SFAS 148, the Corporation provides disclo-
sures as if it had adopted the fair value-based method of measuring
all outstanding employee stock options during 2004, 2003 and 2002.
The following table presents the effect on Net Income and Earnings
per Common Share had the fair value-based method been applied to
all outstanding and unvested awards for 2004, 2003 and 2002.
(Dollars in millions, Year Ended December 31
except per share data) 2004 2003 2002
Net income (as reported) $ 14,143 $ 10,810 $ 9,249
Stock-based employee
compensation expense
recognized during the year,
net of related tax effects 161 78 –
Stock-based employee
compensation expense
determined under fair
value-based method,
net of related tax effects(1) (198) (225) (413)
Pro forma net income $ 14,106 $ 10,663 $ 8,836
As reported
Earnings per common share $ 3.76 $ 3.63 $ 3.04
Diluted earnings per
common share 3.69 3.57 2.95
Pro forma
Earnings per common share 3.75 3.59 2.90
Diluted earnings per
common share 3.69 3.52 2.82
(1) Includes all awards granted, modified or settled for which the fair value was required to be
measured under SFAS 123, except restricted stock. Restricted stock expense, included in Net
Income for 2004, 2003 and 2002 was $288, $276 and $250, respectively.
In determining the pro forma disclosures in the previous table, the
fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model and assumptions appropriate
to each plan. The Black-Scholes model was developed to estimate
the fair value of traded options, which have different characteristics
than employee stock options, and changes to the subjective assump-
tions used in the model can result in materially different fair value
estimates. The weighted average grant date fair values of the options
granted during 2004, 2003 and 2002 were based on the assump-
tions below. See Note 16 of the Consolidated Financial Statements
for further discussion.
Risk-free Interest Rate Dividend Yield
2004 2003 2002 2004 2003 2002
Shareholder approved plans 3.36% 3.82% 5.00% 4.56% 4.40% 4.76%
Broad-based plans(1) n/a n/a 4.14 n/a n/a 4.37
Expected Lives (Years) Volatility
2004 2003 2002 2004 2003 2002
Shareholder approved plans 577 22.12% 26.57% 26.86%
Broad-based plans(1) n/a n/a 4 n/a n/a 31.02
(1) There were no options granted under broad-based plans in 2004 or 2003.
n/a = not applicable