The idea of granting share options seems very lucrative to many corporations and employees, which it very well is. But how does a company treat the very scheme in accounting terms? Where it counts. Essentially, issuing shares is an act of capitalization of the business rather than a cost or an expense of the company. So under the accounting rules it does not have to be included in the company’s income statements and many companies let this go unrecognized. The effect of this act will

A perfect example would be Microsoft a high technology company, the total cost of options granted to their employees is astounding. In 1998, Microsoft announced profits of over 4.5 billion. Also taken from The Amazing Stock Option Bubble (1999), “According to Smithers, if the cost of options awarded that year, plus the change in the value of outstanding options, were treated as an expense, Microsoft would have incurred a loss in excess of $15 billion.”

Stock options are not beneficial to all companies, they can be a risky business. If the company grants stock options to their employees at a certain price and subsequently the market share of the stock falls below of the granted stock price over a period of time during the vesting period, it is called “out of the money” and if the market share is higher than the granted price it is called “in the money”. Many companies have to be re-priced or re-issue new stock options for their employees because the market price have fallen below the granted price. In this case interpretation No. 44 is enforced. In the year 2000 the FASB issued interpretation No. 44, this provides guidance in regards to the re-pricing of its options. Under this policy it is possible that re-pricing any stock options would be need to be recorded as an expense for their fixed stock options. For example, if a company issues 1000 stock options at the price of $100 dollars per share and the price of the stock subsequently falls to $50 dollars per share. Then the company re-prices the stock options at $50 dollars per share and if the stock goes up to $60 dollars per share then the incurred expense would be $10000 dollars at a “mark-to-market” basis. Also, the volatility profile of the company and the industry it

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