Effective January 1, 2003, the Group adopted the fair-value -based method prospectively for all employee awards granted, modified or settled after January 1, 2003. Under the fair-value-based method, compensation cost is measured at the grant date based on the fair value of the share-based award. The fair values of stock option awards are estimated using a Black-Scholes option pricing model. For share awards, the fair value is the quoted market price of the share reduced by the present value of the expected dividends that will not be received by the employee and adjusted for the effect, if any, of restrictions beyond the vesting date. Prior to January 1, 2003, the Group accounted for its share awards under the intrinsic-value-based method of accounting. Under this method, compensation expense is the excess, if any, of the quoted market price of the shares at grant date or other measurement date over the amount an employee must pay, if any, to acquire the shares.
The following table illustrates what the effect on net income and earnings per common share would have been if the Group had applied the fair value method to all share-based awards.
| in € m. | Dec 31, 2003 | Dec 31, 2002 | Dec 31, 2001 |
| Net income, as reported | 1,365 | 397 | 167 |
| Add: Share-based compensation expense included in reported net income, net of related tax effects | 433 | 228 | 671 |
| Deduct: Share-based compensation expense determined under fair value method for all awards, net of related tax effects | (346) | (478) | (875) |
| Pro forma net income (loss) | 1,452 | 147 | (37) |
| in € | |||
| Earnings (loss) per share | |||
| Basic – as reported | 2.44 | 0.64 | 0.27 |
| Basic – pro forma | 2.6 | 0.24 | (0.06) |
| Diluted – as reported | 2.31 | 0.63 | 0.27 |
| Diluted – pro forma | 2.46 | 0.23 | (0.06) |
The Group records its obligations under outstanding deferred share awards and stock option awards in shareholders' equity as share awards – common shares issuable. The related deferred compensation is also included in shareholders' equity. These items are classified in shareholders’ equity based on the Group's intent to settle these awards with its common shares. Compensation expense is recorded on a straight-line basis over the period in which employees perform services to which the awards relate. Compensation expense is reversed in the period an award is forfeited. Compensation expense for share-based awards payable in cash is remeasured based on the underlying share price changes and the related obligations are included in other liabilities until paid.
See Note [20] to the consolidated financial statements for additional information on specific award provisions and the fair values and significant assumptions used to estimate the fair values of options.