The paper analyzes an important issue concerning how corporation should account for employee stock option plans including non-transferable stock options. It is suggested that current GAAP has enabled corporations to improperly accounting for these option, by overstating their compensation expense. Not only is the compensation expense being entirely over stated, it is also being over stated during the service period of the stock option. From the date of grant to the date of exercise of this option, the company is not incurring any expenses from the stock option. The only expense they should really be recognizing is the potential spread of the stock option. The basic idea behind the matching principle is to match expenses with revenues; this seems to be over looked using current GAAP. Instead of using this c
The paper suggests that ESOP be accounted for similarly to how stock appreciation right are accounted for. Current practice for accounting for ESOP is to expense the entire estimate able amount of the option. The current GAAP is neglecting to notice that the company isn’t incurring an expense equal to the exercise price of the option, the company only incurred an expense equal to the spread. Current GAAP is also failing to notice that if the stock options expire before it is exercised the company never incurred an expense, and therefore should adjust the expense account. In this situation under current GAAP the expense account is then overstated. At the date of exercise, the exercise price is subtracted from the capital account that the option is appropriated to during the service period. The expense account is being overstated, once
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