Mindxpansion.com
Title
MindXpansion
Description
Proper Accounting for Stock Options is Required
Companies have been using stock options as a form of incentive compensation for some time as part of the compensation and benefits in their employee stock option plan or equity compensation plan. This has produced significant benefits both for the company that grants them as well as the employee that receives them. The company received favorable accounting treatment for the stock options granted. In the past, accounting rules stipulated that no compensation expense was recorded if a company granted stock options with the exercise price equal to or above the stock price at the time of grant.
However, new rules (SFAS 123) put into effect by the Financial Accounting Standards Board (FASB), require that companies expense options properly at their fair value. FASB clearly states that valuation techniques should take into consideration the following factors: the exercise price of the option, the expected term of the option, the current expected dividends on the underlying share, and the risk-free interest rate.
Companies will have to determine the fair market value of company options as they are granted and record their fair value properly as an expense. This will apply to both incentive stock options (ISO) and nonqualified stock options (NQSO).
