Waste Management 2007 Annual Report Download - page 94

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income in the year in which the changes occur. As required, the Company adopted SFAS No. 158 on December 31,
2006.
With the adoption of SFAS No. 158 on December 31, 2006, we recorded a liability and a corresponding
deferred loss adjustment to “Accumulated other comprehensive income” of $2 million related to the previously
unaccrued liability balance associated with our defined benefit pension and other post-retirement plans. The
December 31, 2006 net increase of $1 million in “Accumulated other comprehensive income” attributable to the
underfunded status of our post-retirement plans is associated with the net impact of adjustments to increase deferred
tax assets by $3 million, partially offset by the additional $2 million related to liabilities recorded.
SFAS No. 123(R) — Share-Based Payment
On January 1, 2006, we adopted SFAS No. 123 (revised 2004), Share-Based Payment, which requires
compensation expense to be recognized for all share-based payments made to employees based on the fair value of
the award at the date of grant. We adopted SFAS No. 123(R) using the modified prospective method, which results
in (i) the recognition of compensation expense using the provisions of SFAS No. 123(R) for all share-based awards
granted or modified after December 31, 2005 and (ii) the recognition of compensation expense using the provisions
of SFAS No. 123, Accounting for Stock-Based Compensation for all unvested awards outstanding at the date of
adoption. Under this transition method, the results of operations of prior periods have not been restated. Accord-
ingly, we will continue to provide pro forma financial information for periods prior to January 1, 2006 to illustrate
the effect on net income and earnings per share of applying the fair value recognition provisions of SFAS No. 123.
Through December 31, 2005, as permitted by SFAS No. 123, we accounted for equity-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,as
amended. Under APB No. 25, we recognized compensation expense based on an award’s intrinsic value. For stock
options, which were the primary form of equity-based awards we granted through December 31, 2004, this meant
we recognized no compensation expense in connection with the grants, as the exercise price of the options was equal
to the fair market value of our common stock on the date of grant and all other provisions were fixed. As discussed
below, beginning in 2005, restricted stock units and performance share units became the primary form of equity-
based compensation awarded under our long-term incentive plans. For restricted stock units, intrinsic value is equal
to the market value of our common stock on the date of grant. For performance share units, APB No. 25 required
“variable accounting,” which resulted in the recognition of compensation expense based on the intrinsic value of
each award at the end of each reporting period until such time that the number of shares to be issued and all other
provisions are fixed.
59
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)