Accounting & auditing update

The key reporting change in the exposure draft Accounting for Stock-based Compensation is the recognition of compensation expense in the income statement when fixed stock options are granted to employees. On balance, fixed stock options do involve a cost to the company. Issuing fixed stock options m...

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Bibliographic Details
Published in:The Ohio CPA journal 1994-04, Vol.53 (2), p.39
Main Author: Cocco, Anthony F
Format: Article
Language:English
Subjects:
Accounting policies
Accounting theory
Compensation
Costs
Employee benefits
Employees
Exposure drafts
FASB exposure drafts
Financial statements
Fixed assets
Opportunity costs
Problems
Stock options
Stockholders
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Summary:The key reporting change in the exposure draft Accounting for Stock-based Compensation is the recognition of compensation expense in the income statement when fixed stock options are granted to employees. On balance, fixed stock options do involve a cost to the company. Issuing fixed stock options more closely resembles the acquiring of fixed assets for shares of stock than it does acquiring cash for shares of stock. When a company issues stock options to employees, it is receiving an asset - prepaid compensation. The exposure draft mandates that, consistent with the matching principle, this asset should be charged to expense as it is used up. Just as bad debt expense is estimated based on projections of future uncollectible receivables, the exposure draft requires that compensation cost can be estimated based only on the number of options that are expected to vest. The initial estimate of compensation cost will be adjusted in the future based on experience.
ISSN:0749-8284