Southwest Airlines 2004 Annual Report Download - page 52

SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
market prices of the underlying stock on the dates of
grant. Compensation expense for other stock options is
not material.
The following table represents the eÅect on net income and earnings per share if the Company had applied the
fair value based method and recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
""Accounting for Stock-Based Compensation'', to stock-based Employee compensation:
2004 2003 2002
(In millions, except
per share amounts)
Net income, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $313 $442 $241
Add: Stock-based Employee compensation expense included in reported
income, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ÌÌÌ
Deduct: Stock-based Employee compensation expense determined under fair
value based methods for all awards, net of related tax eÅects ÏÏÏÏÏÏÏÏÏÏÏÏÏ (74) (57) (53)
Pro forma net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $239 $385 $188
Net income per share Basic, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .40 $ .56 $ .31
Basic, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .31 $ .49 $ .24
Diluted, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .38 $ .54 $ .30
Diluted, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ .30 $ .48 $ .23
As required, the pro forma disclosures above in- payments granted after that date, and based on the
clude options granted since January 1, 1995. For pur- requirements of SFAS 123 for all unvested awards
poses of pro forma disclosures, the estimated fair value granted prior to the eÅective date of SFAS 123R. Under
of stock-based compensation plans and other options is the ""modiÑed retrospective'' method, the requirements
amortized to expense primarily over the vesting period. are the same as under the ""modiÑed prospective''
See Note 13 for further discussion of the Company's method, but also permits entities to restate Ñnancial
stock-based Employee compensation. statements of previous periods based on proforma dis-
closures made in accordance with SFAS 123.
In December 2004, the FASB issued
SFAS No. 123R, ""Share-Based Payment''. The Company currently utilizes a standard option
SFAS No. 123R is a revision of SFAS No. 123, pricing model (i.e., Black-Scholes) to measure the fair
""Accounting for Stock Based Compensation'', and su- value of stock options granted to Employees. While
persedes APB 25. Among other items, SFAS 123R SFAS 123R permits entities to continue to use such a
eliminates the use of APB 25 and the intrinsic value model, the standard also permits the use of a ""lattice''
method of accounting, and requires companies to recog- model. The Company has not yet determined which
nize the cost of employee services received in exchange model it will use to measure the fair value of employee
for awards of equity instruments, based on the grant stock options upon the adoption of SFAS 123R. See
date fair value of those awards, in the Ñnancial state- Note 13 for further information.
ments. The eÅective date of SFAS 123R is the Ñrst
reporting period beginning after June 15, 2005, which SFAS 123R also requires that the beneÑts associ-
is third quarter 2005 for calendar year companies, ated with the tax deductions in excess of recognized
although early adoption is allowed. SFAS 123R permits compensation cost be reported as a Ñnancing cash Öow,
companies to adopt its requirements using either a rather than as an operating cash Öow as required under
""modiÑed prospective'' method, or a ""modiÑed retro- current literature. This requirement will reduce net
spective'' method. Under the ""modiÑed prospective'' operating cash Öows and increase net Ñnancing cash
method, compensation cost is recognized in the Ñnan- Öows in periods after the eÅective date. These future
cial statements beginning with the eÅective date, based amounts cannot be estimated, because they depend on,
on the requirements of SFAS 123R for all share-based among other things, when employees exercise stock
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