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Debate the thoeries of Accounting for stock options - Research Paper Example
Finance & Accounting
Pages 8 (2008 words)
Theories of Accounting for Stock Options. (Name) (University) (Course) (Tutor) (Date) Introduction The principal debate is whether compensation expenditure should be recognized for both stock options and if it so, the time frame over which it should be allocated…
Fair value model, lattice model and finally minimum value method which is based upon the someone’s willingness to purchase a call option on a share of stock at the current fair value of the stock with the right to postpone payment of the exercise until the end of the options period, ignoring the volatility of the underlying stock in valuation calculation. This has necessitated the emergence of alternative incentive methods to premium cash thus employee stock options. Any stock option with exercise price higher than the price of the underlying stocks at the exercise date are exchanged for new ones with lower exercise price because companies have to account for the stock issued to their employees. But the companies have to account for them although they do not incur any costs to grant the options. Guides and standards on how such transactions are accounted for in the books of the company have to be provided. Stock option compensation that needs to be looked at is the backdating of employee stock option and how it affects the company. Agency theory argues that compensation policy should provide management with incentives to select and implement actions that add shareholder wealth. ...
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