Storm brews over stock-based compensation rule: FASB stock compensation proposal makes good accounting sense

The most controversial aspect of FASB's Exposure Draft is the proposed requirement to record compensation expense for stock options based on their fair value at grant date. Numerous studies have shown that changes in accounting principles have little or no impact on company stock prices. The ar...

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Bibliographic Details
Published in:Business credit 1994-06, Vol.96 (6), p.21
Main Author: Eichen, Susan
Format: Magazinearticle
Language:English
Subjects:
Accounting
Cash flow
Compensation plans
Disputes
Earnings
Executive compensation
Exposure drafts
FASB exposure drafts
Grants
Impacts
Incentive plans
Public policy
Put & call options
Securities industry
Stochastic models
Stock options
Stock prices
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Summary:The most controversial aspect of FASB's Exposure Draft is the proposed requirement to record compensation expense for stock options based on their fair value at grant date. Numerous studies have shown that changes in accounting principles have little or no impact on company stock prices. The area of greatest concern is the reliability of the proposed measurement method. Although the binomial and Black-Scholes models are imperfect, they produce far more accurate results than current practice, which values most options as worthless at grant date. The Exposure Draft would correct many of the inconsistencies of current accounting rules, providing companies with a new opportunity to design creative, effective stock compensation plans.
ISSN:0897-0181