Accounting for Stock Options
John C. Rogers
BUS 650 Managerial Finance
August 6, 2012
Accounting for Stock Options
“Accounting for stock options has been one of the most controversial topics in accounting during the last decade. The principal debate is whether compensation expense should be recognized for stock options and, if so, the periods over which it should be allocated” (Apostolou & Crumbley, 2004, p. 30). The two methods used to calculate the expense regarding stock options are the "intrinsic value" method and the "fair-value" method. Only the fair-value method is currently as part of generally accepted accounting principles. Businesses act to gain ...view middle of the document...
While it is extremely beneficial for employees to take advantage of any sort of stock option plan at their place of employment, it would also be extremely beneficial for investors and financiers alike to be able to rely on a consistent way of reporting and comparing stock option plans in the ever-expanding arena of employee stock options plans.
There are a number of different reasons why a company would offer stock options to its employees, and a number of different ways doing so can help the company. Offering stock options to employees helps to build employee loyalty and ensure that they are happy and eager to continue to produce at a high level. These plans are also in place to help the organization financially, by selling more and more of its stock. In essence, employee stock options are a win-win for organizations. Yet, in years past, stock options were certainly not offered to all employees. Only high-level employees and executives were offered a stock option plan, and lower level employees were excluded. As the world markets have changed in today’s economy, it is now commonplace for an organization to offer some sort of benefit package that includes a stock option plan of some sort.
When people are looking for new employment, one of the main factors that applicants pay close attention to is the potential benefits that they can take part in at the company. People want to be sure that while they dedicate time and energy to an organization, they are in turn taken care of by the company. In some cases, the level of benefits offered to employees can be a deal-breaker for someone. In my professional career, I have been only recently been offered a stock option plan, in addition to a comprehensive medical benefits plan. With my current company, employees are offered stock twice a year at a discounted rate of 5% below the current market price. Obviously, this sort of deal for employees is enticing, to say the least. Employees who take part in my company’s stock option plan have the potential to save and earn some money if the stock stays the same price or goes up. If, for instance, he price dips below the purchase price, there is a 5% buffer with which to work.
In most cases with an organization, there is a type of timeline involved when an employee has the ability to actually purchase the company’s stock. There are many cases where employees have to be fully vested, or when the employee has control of the ability to invest, until they are able to exercise their stock purchasing privileges. These organizations try to use these stock options to employees as a way to build value for the organization, and as a way to give monetary compensation back to the employee in a form that is not cash. Companies provide employee stock options as a form of compensation for a variety of reasons: “To minimalize the firm’s compensation costs, to conserve case, and to avoid the limits on the tax deductibility of cash compensation. Employee...