Question

•Compare the two (2) main accounting issues associated with stock option plans. Make one (1) recommendation to FASB for overcoming obstacles in accounting for stock option plans. Provide one (1) specific example of the way in which your recommendation could improve the accounting for stock option plans.

Answer 1

Two main accounting issues of “Stock-options” plan:

1) Determining the compensation expense: Under the fair market value method, total compensation expense related to this plan is calculated based on the fair value of expected options to be vested on the day, the options are granted to the employees. Publically listed firms generally estimate the fair value of stock-options based on option pricing models with the adjustments to any unique feature adopted in the employee stock options. After the value is decided on the grant date, no adjustment is made to any subsequent changes in the market value of stock prices irrespective of their movement direction.

2) Determining the periods to allocate the compensation expense: Under a general condition, a compensation expense is recorded in a period, in which employees work. In a stock-option plan, the compensation expense is allocated over the entire period, the option is vested, which is the time between the grant date and the fully vesting date, if not stated otherwise. This results in companies determining the entire compensation cost on the date of grant and allocating it through the period of employee’s service in the organization.