UPS 2005 Annual Report Download - page 69

UNITED PARCEL SERVICE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Stock-Based Compensation
Effective January 1, 2003, we adopted the fair value measurement provisions of FASB Statement No. 123
“Accounting for Stock-Based Compensation” (“FAS 123”). In years prior to 2003, we used the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”). Under APB 25, we did not have to recognize compensation expense for our stock
option grants and our discounted stock purchase plan, however we did recognize compensation expense for our
management incentive awards and certain other stock awards (see Note 11 for a description of these plans).
Under the provisions of FASB Statement No. 148 “Accounting for Stock-Based Compensation—Transition
and Disclosure,” we have elected to adopt the measurement provisions of FAS 123 using the prospective method.
Under this approach, all stock-based compensation granted subsequent to January 1, 2003 will be expensed to
compensation and benefits over the vesting period based on the fair value at the date the stock-based
compensation is granted. Stock compensation awards granted to date include stock options, management
incentive awards, restricted performance units, and employer matching contributions (in shares of UPS stock) for
a defined contribution benefit plan. The adoption of the measurement provisions of FAS 123 reduced 2005, 2004,
and 2003 net income by $52 million ($0.05 per diluted share), $35 million ($0.03 per diluted share), and $20
million ($0.02 per diluted share), respectively.
The following provides pro forma information as to the impact on net income and earnings per share if we
had used the fair value measurement provisions of FAS 123 to account for all stock-based compensation awards
granted prior to January 1, 2003 (in millions, except per share amounts).
2005 2004 2003
Netincome ........................................................ $3,870 $3,333 $2,898
Add: Stock-based employee compensation expense included in net income, net of
tax effects ....................................................... 157 563 456
Less: Total pro forma stock-based employee compensation expense, net of tax
effects .......................................................... (165) (588) (507)
Proformanetincome ................................................ $3,862 $3,308 $2,847
Basic earnings per share
As reported .................................................... $ 3.48 $ 2.95 $ 2.57
Proforma ..................................................... $ 3.47 $ 2.93 $ 2.52
Diluted earnings per share
As reported .................................................... $ 3.47 $ 2.93 $ 2.55
Proforma ..................................................... $ 3.46 $ 2.91 $ 2.50
The fair value of each option grant is estimated using the Black-Scholes option pricing model.
Compensation cost is also measured for the fair value of employees’ purchase rights under our discounted stock
purchase plan using the Black-Scholes option pricing model. The weighted-average assumptions used, by year,
and the calculated weighted average fair value of options and employees’ purchase rights granted, are as follows:
2005 2004 2003
Stock options:
Expected dividend yield .............................................. 1.60% 1.50% 1.22%
Risk-free interest rate ................................................ 4.18% 4.31% 3.70%
Expected life in years ................................................778
Expected volatility .................................................. 18.21% 15.69% 19.55%
Weighted average fair value of options granted ........................... $17.33 $16.24 $17.02
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