7.1.11: Accounting for Options

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Abstract

Under historical accounting conventions an employee option does not entail compensation expense for shareholder reporting purposes regardless of the amount the employee ultimately clears. The only impact of an option is on earnings per share, when that number is measured on a fully diluted basis. The theory is, under APB Opinion No. 25, that (with respect to most stock options, at least) the value of the compensation is fixed as of the date the option is issued. And, if the option exercise price is pegged (as it ordinarily is) to the "fair value" of the option stock and the option itself does trade in any established market, then there is no determinate amount which impacts the income statement. Since the value has been (once and for all) determined, the grantor's earnings are unscathed despite the option appreciating in value. By way of contrast, a stock plan, which periodically awards...

Sub-Topics

• 7.1.11.a: Stock Options Revisited: A Renewed Focus On Net Exercise Provisions