Stock option expensing
Encyclopedia
Stock option expensing is a method of accounting for the value of share options, distributed as incentives to employees, within the profit and loss reporting of a listed business.
on the income statement, balance sheet, and cash flow statement say that the loss from the exercise is accounted for by noting the difference between the market price (if one exists) of the shares and the cash received, the exercise price, for issuing those shares through the option.
Opponents of considering options an expense say that the real loss- due to the difference between the exercise price and the market price of the shares- is already stated on the cash flow statement.
They would also point out that a separate loss in earnings per share (due to the existence of more shares outstanding) is also recorded on the balance sheet by noting the dilution of shares outstanding. Simply, accounting for this on the income statement is believed to be redundant to them.
Note: Currently, the future appreciation of all shares issued are not accounted for on the income statement but can be noted upon examination of the balance sheet and cash flow statement.
The fair-value method uses either the price on a market or calculates the value using a mathematical formula such as the Black-Scholes model, which requires various assumptions as inputs. This method is now required under accounting rules.
In 2002, another method was suggested: expensing the options at the difference between the market price and the strike price when the options are exercised, and not expensing options which are not exercised, and reflecting the unexercised options as a liability on the balance sheet. This method, which defers the expense, was also requested by companies. A method to eventually reconcile the grant date fair-value estimates with the eventual exercise price was also proposed.
on the income statement, balance sheet, and cash flow statement say that the loss from the exercise is accounted for by noting the difference between the market price (if one exists) of the shares and the cash received, the exercise price, for issuing those shares through the option.
Opponents of considering options an expense say that the real loss- due to the difference between the exercise price and the market price of the shares- is already stated on the cash flow statement.
They would also point out that a separate loss in earnings per share (due to the existence of more shares outstanding) is also recorded on the balance sheet by noting the dilution of shares outstanding. Simply, accounting for this on the income statement is believed to be redundant to them.
Note: Currently, the future appreciation of all shares issued are not accounted for on the income statement but can be noted upon examination of the balance sheet and cash flow statement.
Methods
The two methods to calculate the expense associated with stock options are the "intrinsic value" method and the "fair-value" method. Only the fair-value method is currently U.S. GAAP. The intrinsic value method, associated with Accounting Principles Board Opinion 25, calculates the intrinsic value as the difference between the market value of the stock and the exercise price of the option at the date the option is issued (the "grant date"). Since companies generally issue stock options with exercise prices which are equal to the market price, the expense under this method is generally zero.The fair-value method uses either the price on a market or calculates the value using a mathematical formula such as the Black-Scholes model, which requires various assumptions as inputs. This method is now required under accounting rules.
In 2002, another method was suggested: expensing the options at the difference between the market price and the strike price when the options are exercised, and not expensing options which are not exercised, and reflecting the unexercised options as a liability on the balance sheet. This method, which defers the expense, was also requested by companies. A method to eventually reconcile the grant date fair-value estimates with the eventual exercise price was also proposed.