The Controversy of Stock Compensation Accounting

Employee stock option plans are unique and considerably different from cash compensation. Employee stock option plans were designed to promote loyalty and provide the incentive to increase shareholder value. In recent years many variations of the basic employee stock option plan have been developed and are not specifically covered by existing standards. The existing accounting standards were set in 1953 and amended in 1972. The Financial Accounting Standards Board (FASB) began the employee stock option plan project in 1984 to improve the neutrality of the standards. Nine years later after many delays and heated debate FASB issued a proposed statement. The controversy centers on the issue of expense recognition, valuation methods, and measurement date. The new statement would require recognition of compensation expense regardless of the type of stock option plan and would require the use of an option pricing model to value the stock options. This thesis is an in depth study of the current employee stock option accounting issues. A literature search was conducted to identify the issues surrounding the controversy in employee stock option accounting. I discuss the evolution of employee stock option plans, describe various types of plans, the current standard, the proposed standard and the arguments surrounding employee stock option accounting practices