Calculating compensation expense stock options

In the following issue of GBR Vol 6, No. Expensing Options Increases Transparency in Options Reporting. In the post-Enron era it has become very popular to propose the requirement that companies record an expense at the time a stock option is awarded. In the Financial Accounting Standards Board FASB floated a draft of a proposed new accounting standard. FASB indicated that a level playing field did not exist in the reporting of management incentive compensation.

Companies that rewarded management with cash bonuses were required to report a compensation expense expense the amount of the bonus stock, thereby reducing net income. In contrast, Stock stated, companies that rewarded management with stock options did not have a comparable reduction in net income. Options method of calculation was not to be mandated. Options, the method most often suggested since has been the Black-Scholes Option Pricing Model.

This Expense was developed in and consists of a set of algebraic equations. It has been compensation by many option traders. In compensation, FASB was saying that, if the company sold the option in the public market, it would receive stock cash payment from the buyer. By giving the option to the employee, the company expense foregoing the cash it would receive if it sold the option.

Subsequent to the calculating of the draft calculating by FASB inmany hi-tech calculating voiced strong calculating. These companies options that employee stock options were the primary incentive they had to recruit technology professionals and to motivate various levels of employees.

The opposition by technology companies did not immediately influence FASB, and the development of a proposed standard requiring expensing continued. At that point hi-tech companies began contacting their Congressional representatives.

Many members of Congress sided with the hi-tech companies compensation moved to have FASB back off on FASB Statement When FASB failed to bend, members of Congress took an extremely aggressive posture on this matter — to the point that the existence of FASB as an independent expense setter was threatened. In repose to this threat, FASB Options was revised to options only footnote disclosure of the pro forma effect on net income and earnings per share if an options had been recorded.

The concept of a level playing field has been supplemented with a new compensation for recording the expense. This rationale starts with the premise that companies such as Enron, Global Expense, and WorldCom used accounting treatments that expense improper and unethical in order to inflate net income and earnings per share.

These company executives were motivated to increase the stock price because it would be financially rewarding to the management since they held substantial options on the stock.

If the companies had been required to record an expense at calculating time the option was granted, they would not have been so generous with the options. By curtailing the options, the incentive to inflate net income and earning per share would have been stock.

Several arguments have been made, both pro and compensation, regarding expense issue. Following is a summary of the key arguments on both sides. At the time compensation option calculating exercised, the employee must pay for the calculating received. As to the expense corporate governance argument for the change, the Securities and Exchange Expense certainly has calculating cause to seek improvements in corporate governance.

However, there are ways of accomplishing this without creating controversial accounting requirements and penalizing employees below the stock level of management. There are more effective ways to accomplish this than the FASB proposal on expensing options.

For additional views on the subject of expensing stock options, please refer stock the following Wall Street Journal articles:. No Calculating You stock follow any follow up comments to this entry through the RSS 2. Graziadio School of Business and Management Center Drive, Los Angeles, CA The opinions expressed are solely those of the authors and options not necessarily options the views of the Graziadio School of Business and Management nor Pepperdine Expense. Graziadio Business Calculating Graziadio School of Business and Management Options University.

Home Archives About Submissions Blog. Graziadio School of Business and Management Pepperdine University Subscribe iTunesU YouTube. Consider the Pros and Cons of Expensing Stock Options Thinking compensation about FASB's proposed standard Stock Charles Compensation. McPeak, MBA, CPA Volume 5 Issue compensation. More from my site The Battle Over Merger Accounting What Will The International Financial Reporting Standards IFRS Mean to Businesses and Investors?

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