Stock-based compensation plans are now a common feature of employee
remuneration, not just for directors and senior executives, but for many other
employees as well. However, regardless of the increasing use of stock-based
payment, there is no existing International Financial Reporting Standard (IFRS)
on how to account for these transactions. Concerns have been raised about this
lack of an international standard.
Financial Accounting Standards Board (FASB) in the United States and
International Accounting Standards Board (IASB) have recently been working
on this topic. To date, all have agreed that all stock-based payment transactions
should be recognised in the financial statements, resulting in an expense in the
income statement.
Already, in 1993, the FASB attempted to put into place an accounting standard
that would require companies to treat stock options as an operating expense and
incorporate them into their income statements. This proposed statement was
strongly opposed by companies.
There are several questions which can be asked about stock-based
compensation, namely:
• Should companies expense stock options?
• How should stock options be valued?
• Is granting an option a once-only expense for companies or is it a
contingent liability, the potential cost of which changes with fluctuations
in market price of companies’ shares and the final cost of which becomes
clear when options are exercised or expire?
The standard-setting bodies, IASB and FASB in this thesis, and the companies
have different answers with regard to these questions. We will examine what
issues bring up the most controversy and what are the more accepted answers
when it comes to implementing the accounting for stock options in practice.
We review the stock option pricing models available to date and distinguish
their drawbacks when they are applied to value employee stock option plans.
We selected thirty two Comment Letters from the vast number of those
submitted by vario...
