In July 2005 Microsoft adopted SFAS 123 (R), Share-based Payment, which required companies to recognize expenses related to stock options. In the company’s 2015 annual report, Microsoft reported net income of $12.2 billion, $22.1 billion, and $21.9 billion in the years ending June 30, 2015, 2014, and 2013, respectively. It also reported “stock-based compensation expense” on the statement of shareholders’ equity of $2.6 billion, $2.4 billion, and $2.4 billion for 2015, 2014, and 2013, respectively.

REQUIRED:
a. Explain the nature of stock-based compensation expense.
b. Why would it appear on the statement of shareholders’ equity, and on what other financial statement would it also appear?
c. Would you consider stock option expense to be material for Microsoft, and why?
d. Explain why many companies resisted SFAS 123 (R).