1 Accounting for Share-Based Payments Abstract

Statement No. 123 (revised 2004), which significantly changes the accounting for employee stock options. Under the new standard, equity-based compensation results in a cost to the issuing enterprise and should be measured at its fair value on the grant date, based on the estimated number of awards that are expected to vest. I contend that expensing stock or option grants is not responsive to either the needs of a corporation’s creditors, or to the needs of equity investors since the cost of the share-based payments is borne only by the pre-existing shareholders; the corporation itself suffers no sacrifice in assets or other resources1 (unless its own shares are considered an asset, which is not the case under the present Conceptual Framework and GAAP). Hence I suggest the use of three separate statements instead of the single income statement now provided. Specifically, I propose that the first statement-- the “Corporation Income Statement ”--not include share-based payments as an expense. Rather, a “Statement of Costs and Benefits to Pre-existing Shareholders ” would show the dilution cost to the pre-existing shareholders; this dilution cost would be determined as the amounts that, if accrued during each year throughout the vesting period and until exercise, would cumulativel