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Accounting for Stock Options: Measuring the Real Cost Through Time

Accounting for Stock Options: Measuring the Real Cost Through Time Accounting for stock options is a controversial issue. The FASB recognized that the “intrinsic value” method, which had been used for years, failed to adequately account for the costs involved. To rectify the problem they suggested the use of a “fair value” method. Their proposal met with strong objections from companies, which were concerned with the impact of the proposed standard on their reported profits. Consequently, the board relented and allowed the use of either method. Unfortunately, both the intrinsic value and fair value approaches have deficiencies, particularly in regard to how they measure compensation expense and gains and losses over time. This paper addresses these shortcomings by developing two alternative cost measurement approaches that apply an option‐pricing model on an iterative basis over the life of the option. Both approaches represent specific ways to implement exercise‐date measurement techniques for stock options. The paper argues that both approaches provide more relevant and reliable measures of an option’s cost than either intrinsic or fair value methods. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Business Emerald Publishing

Accounting for Stock Options: Measuring the Real Cost Through Time

William R. Cron; Randall B. Hayes
American Journal of Business , Volume 19 (2): 10 – Jan 1, 2004
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References (7)

Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
1935-5181
DOI
10.1108/19355181200400008
Publisher site
See Article on Publisher Site

Abstract

Accounting for stock options is a controversial issue. The FASB recognized that the “intrinsic value” method, which had been used for years, failed to adequately account for the costs involved. To rectify the problem they suggested the use of a “fair value” method. Their proposal met with strong objections from companies, which were concerned with the impact of the proposed standard on their reported profits. Consequently, the board relented and allowed the use of either method. Unfortunately, both the intrinsic value and fair value approaches have deficiencies, particularly in regard to how they measure compensation expense and gains and losses over time. This paper addresses these shortcomings by developing two alternative cost measurement approaches that apply an option‐pricing model on an iterative basis over the life of the option. Both approaches represent specific ways to implement exercise‐date measurement techniques for stock options. The paper argues that both approaches provide more relevant and reliable measures of an option’s cost than either intrinsic or fair value methods.

Journal

American Journal of Business – Emerald Publishing

Published: Jan 1, 2004

Keywords: Accounting; Stock options; Option‐pricing model

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