Financial Reporting: 

Stock Option Expensing

 

How should stock options granted to employees be reported in the financial statements?

Position: All stock option grants should be reported at fair value (market value) in the balance sheet with changes in the fair values reported in net income as the changes occur.

Rationale:

• Stock options are a form of compensation

• Accounting for compensation should not depend upon the form of the payment or the currency used for the payment

• All compensation including stock options should be reported at fair value based upon market values and expensed in net income as incurred or as the fair values change

• Grants of stock options that have not yet been exercised should be recorded as liabilities until settlement

• Models used for determining the market values of stock option grants should be disclosed, including market inputs used in valuing the options

• Any changes in inputs or terms and conditions of the grants should be prominently disclosed in the footnotes to the financial statements

Where stated: FAS 123 and 95 - Share-Based Payment 04; FAPC - H.R. 3574 Stock Option Reform 04; AIMR - Enron &acctg for Stock Options 03; GFRAC - ED 2 Share-Based Payments 03 (PDF); Stock-Based Comp - FASB -v- IASB 03; FAPC - FAS 123 Amendment 02; G4+1 Paper - Share-based Comp 02; Comprehensive Business Reporting Model