Volume 11, No. 12

 

Accounting Essentials:  Compensation Paid In Stock Options:  Since Coca-Cola's surprise announcement that they would begin to record the compensation expense related to stock options, there's been a spasm of corporate "me-tooism." Concurrently, the accounting standard-setters have been working on either revamping transition rules for existing option-related standards (the FASB) or developing entirely new option-accounting standards (the IASB). The financial press has been running one editorial after another regarding either the virtues or the vices of recognizing compensation expense related to options. There's an awful lot of misinformation out there about the subject - and it's important enough that anyone who has an opinion on it (and that's nearly everyone) owes it to themselves to understand the concepts underlying either the existing standards or the standards that are in the works. That's no small task: there are tough concepts involved in measuring the compensation represented by option awards. An entire level of debate centers on just how well something like the Black-Scholes option pricing model can be used to measure the fair value of employee options, and as well, there are issues regarding the timing of such measurement. This report outlines the issues involved in recognizing compensation expense tied to stock options and also examines the Black-Scholes assumptions used in estimating fair value of option grants in the S&P 500 companies.

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