Accounting for Employee Stock Options

In December 2004, FASB issued Statement of Financial Accounting Standards (SFAS) 123(R), Share-Based Payment, effective for public entities beginning on the first interim or annual reporting period after Jun 15, 2005. This statement superseded SFAS 123, Accounting for Stock-Based Compensation, issued in 1995. FASB's methods for valuing stock options -- under SFAS 123(R) and certain sections of Accounting Standards Codification Topic 718, "Stock Compensation" -- require many estimates. This article's authors believe their proposed alternative to FASB's treatment of stock option valuation is more accurate and more conceptually sound. With respect to stock option awards, an employee receives compensation when exercising the options. The options will be exercised when the fair value of the shares that will be obtained exceeds the exercise price of the options. In SFAS 123(R), FASB rejected exercise date measurement -- not because of any specific argument against it, but simply because the board instead adopted grant date measurement.