Question

Client X offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that employee stock options, like all obligations to issue the corporation's own stock, are equity. The new staff accountant, Marcy Means, disagrees. Marcy argues that when a company issues stock for less than current value, the value of preexisting stockholders' shares is diluted. Write a team consensus response of no more than 700 words in which you answer the following requirements: Pretend you are hired to debate the issue of the proper treatment of options written on a company's own stock. Formulate your argument, citing concepts and definitions to buttress your case, assuming: You are siding with John

Answer 1

Answer :

As indicated by FASB Act 717-10-25-2 , entity ought to perceive the administration or service got from representatives or employees in share bond payments when these are received .It ought to perceive or recognize as increase in equity or liability which rely on instrument gave as the instrument fulfill classification criteria . Employee stock option is for fundamentally option given by organization for organizations workers to buy a equity share at strike price.Many organizations use Employee stock option intends to redress ,hold ,and attract representatives .These plans are contracts between an organization and its representatives that give workers the option to purchase a particular number of the organizations share at a fixed cost inside a specific time frame .The fixed cost frequently called the grant or exercise cost.

Main advantages of stock option plan to organization is to generate fund and vesting period . Means vesting period for workers for exercising power for that plan and company get fund for some particular time span . Workers who are allowed stock option would like to benefit by exercising their options to purchase shares at the exercise cost when the shares are trading at a value that is higher than the exercise cost .

At some point organizations revalue the cost at which the options can be exercised.

For example: -

At the point when an organization stock option has fallen below the original value .Companies revalue the exercise cost as an approach to hold or retain their workers.

Along these lines, in the given case the two perspectives are correct on the grounds that issue cost for not exactly the present worth then in current time estimation of shares get diluted yet regardless of whether it diluted share cost get diluted then it is obligation of equity share holders of the organization .Employees stock option plan ought not be mistaken for the term ESOPs OR Employee stock ownership plans, which are retirement plans.