American Airlines 2002 Annual Report Download - page 58

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56
1. Summary of Accounting Policies (Continued)
Employee Accruals The Company estimates the amount of potential retroactive pay expected to be provided
upon finalization of a labor agreement for work groups working under contracts that have become amendable.
These estimates are based upon management’s expectation of the most likely outcome of the contract
negotiations.
Stock Options The Company accounts for its stock-based compensation plans in accordance with Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related
Interpretations. Under APB 25, no compensation expense is recognized for stock option grants if the exercise
price of the Company’s stock option grants is at or above the fair market value of the underlying stock on the date
of grant. The Company has adopted the pro forma disclosure features of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by Statement of
Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”.
As required by SFAS 123, pro forma information regarding income (loss) from continuing operations before
extraordinary loss and cumulative effect of accounting change and earnings (loss) per share from continuing
operations before extraordinary loss and cumulative effect of accounting change have been determined as if the
Company had accounted for its employee stock options and awards granted subsequent to December 31, 1994
using the fair value method prescribed by SFAS 123. The fair value for the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for
2002, 2001 and 2000: risk-free interest rates ranging from 4.30% to 6.15%; dividend yields of 0%; expected stock
volatility ranging from 43.5% to 45.2%; and expected life of the options of 4.5 years and 1.5 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s
employee stock options have characteristics significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee
stock options.
The following table illustrates the effect on net earnings (loss) and earnings per share amounts if the
Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation
(in millions, except per share amounts):
Year Ended December 31,
2002 2001 2000
Net Earnings (Loss), as reported $ (3,511) $ (1,762) $ 813
Add: Stock-based employee compensation
expense included in reported net
earnings (loss), net of tax 5 14 32
Deduct: Total stock-based employee
compensation expense determined
under fair value based methods for all
awards, net of tax (36) (31) (39)
Pro forma net earnings (loss) $ (3,542) $ (1,779) $ 806
Earnings (loss) per share:
Basic – as reported $ (22.57) $ (11.43) $ 5.43
Basic – pro forma $ (22.77) $ (11.54) $ 5.38
Diluted – as reported $ (22.57) $ (11.43) $ 5.03
Diluted – pro forma $ (22.77) $ (11.54) $ 4.98