Question

Essay on Stock Compensation. Note: you do not need to answer in complete sentences; short phrases are okay

1. What accounting standard in 2004 caused stock options to decline as the primary source of non-cash compensation? Why?

2. Does compensation expense from stock options meet the definition of an expense as discussed in SFAC 6? Why?

3. Do you think compensation expense from stock options should be recognized as an expense? Choose one position, and support it.

Answer 1

ABP No. 25 issued in October 1972 on "Accountong for Stock issued to Employees " was supersede by SFAS 123 ossued in December 2004 after the manner of recognition of Employee Stock option Compensation expense was changed. The latter standard provided that all the stock options issued by public entities to employees must be recognised at its fair value which is applied by using Opting pricing model (e.g., Black-Scholes model, binomial model) . Further the compensation expense that is Issue price (fair value) less the book value will be charged to Profit and loss account over the vesting period or the service period whichever is less, equally.And no reversal of such compensation cost charged shall be allowed in case the options expires and remain unvested. Hence a major change of diaallowing the cost of compensation in a single and allowing over the period of years caused entities to reduce the use of stock options as a mode of non-cash compensation.

2. SFAC 6 on "Elements of financial statements" defines an Expense as an amount incurred that created an outflow of assets or increase in liabilities from activities that form a major part of the entity's operational activities. Hence as cost of compensation incurred by issuing the stock options to employees shall be considered to as an over the vesting period. That is to say, as part of the vests to the employees over the service period, the related cost will also be considered as an 'expense' in proportion to the option coat vested because in between the vesting period the entity or the employee have the right to revoke the options if the terms allowed and hence only part of libilty is created so expense will also be charged partly.