New Stock Option Accounting Must Be Applied Properly

The new stock option accounting is probably the most controversial accounting change in years. This is because (i) some companies view stock options as an integral part of their compensation strategy, and are resisting the substantial income change, and (ii) the methods of valuing employee stock options are not well established or accepted. To avoid overstating the new stock option expense, companies will need to carefully consider how this new pronouncement is implemented.

Since 1972, companies have generally treated options as an expense only if the option’s strike price was below the company’s share price when the options were granted. Because of this and similar tax provisions, virtually all employee stock options are issued with strike prices equal to the underlying stock’s then-current market price.