Bank of America 2005 Annual Report Download - page 133

BANK OF AMERICA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements—(Continued)
January 1, 2007. Management is currently evaluating the effect of the exposure draft, which is required to be reflected
as a change in the opening balance of retained earnings in the period of adoption.
On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004) “Share-based Payment” (SFAS 123R) which
eliminates the ability to account for share-based compensation transactions, including grants of employee stock options,
using Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), and
generally requires that such transactions be accounted for using a fair value-based method with the resulting
compensation cost recognized over the period that the employee is required to provide service in order to receive their
compensation. SFAS 123R also amends SFAS No. 95, “Statement of Cash Flows,” requiring the benefits of tax
deductions in excess of recognized compensation costs to be reported as financing cash flows, rather than as operating
cash flows as currently required. The Corporation adopted the fair value-based method of accounting for stock-based
employee compensation prospectively as of January 1, 2003. The Corporation adopted SFAS 123R effective January 1,
2006 under the modified-prospective application. Upon adoption of SFAS 123R and as a result of a recent Securities and
Exchange Commission (SEC) Staff (the Staff) interpretation, the Corporation changed its approach for recognizing stock
compensation cost for employees who meet certain age and service criteria and thus, are retirement eligible as described
in the plan. For any new awards granted, the Corporation will recognize stock compensation cost immediately for
awards granted to retirement eligible employees or over the period from the grant date to the date retirement eligibility
is achieved. Prior to adoption of SFAS 123R, awards granted to retirement eligible employees were expensed over the
stated vesting period. Accordingly, the Corporation expects that earnings per common share will be reduced by
approximately $0.05 in the first quarter due to the acceleration of stock-based compensation expense. The incremental
impact of the change is approximately $0.04 for the full year when compared to expensing over the stated vesting period.
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 transition 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 modified 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 disclosures as if it had adopted the fair value-based method
of measuring all outstanding employee stock options during 2005, 2004 and 2003. 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 2005, 2004 and 2003.
Year Ended December 31
(Dollars in millions, except per share data) 2005 2004 (Restated) 2003 (Restated)
Netincome(asreported)................................................................. $16,465 $13,947 $10,762
Stock-based employee compensation expense recognized during the year, net of related tax
effects ............................................................................... 203 161 78
Stock-based employee compensation expense determined under fair value-based method, net of
related tax effects(1) ................................................................... (203) (198) (225)
Pro forma net income ............................................................. $16,465 $13,910 $10,615
As reported
Earnings per common share .............................................................. $4.10 $ 3.71 $ 3.62
Diluted earnings per common share ....................................................... 4.04 3.64 3.55
Pro forma
Earnings per common share .............................................................. 4.10 3.70 3.57
Diluted earnings per common share ....................................................... 4.04 3.63 3.50
(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 (net of taxes), included in Net Income for 2005, 2004 and 2003 was $308 million, $187
million and $179 million.
97