FAS 123- Accounting For Stock Options

When people think of business and business practices one thought that comes to mind is money. Money is the biggest driving force for a business to be successful. With all the transactions that take place in a business, whether that business be a large corporation or a small “Mom and Pop” store, keeping track of all the flows of money can get immensely complex. That is why we have created agencies to set standards so proper accounting practices will be performed. Two of these agencies are the Securities and Exchange Commission (SEC), set up by our federal government, and the privately created, Financial Accounting Standards Board (FASB). The standards the FASB creates are known as Generally Accepted Accounting Principles (GAAP). When an accounting controversy arises accounting agencies will step in to help solve the problem.

One accounting issue that was prominent in the late 1980s and early 1990s was, accounting for employee stock-based compensation or stock options. Today the accounting statement made by FASB, number 123 - Accounting for Stock-Based Compensation, is the most recent addition on how to account for stock options. But before the FASB issued this statement

“…[Stock option] expense is measured by the excess, if any, of the underlying stock value over the option exercise price (the intrinsic value). (Rouse and Barton, p. 68).

Any organization that still wishes to use Opinion No. 25 must provide disclosures to net income and earnings per share as if using the fair value method.

These two categories of companies showed the greatest amount of opposition to the Exposure Draft. The FASB received over 1,700 letters in complaints with most of them opposing a requirement to record compensation expense (Mozes, p. 145).

In October of 1995, the FASB issued Statement No. 123, Accounting for stock-based compensation. Taken from FASB.org, some of the key points stated by SFAS 123 are as follows:

To first begin, the SEC was first created in 1934 by the Securities and Exchange Act passed by Congress. One of the SEC’s responsibilities is to require companies provide accurate financial information to investors and the general public. The FASB was created in 1973 because the current standard setter at the time, the APB, was losing credibility (Drula et al.). While the FASB develops GAAP, the SEC has the power to enforce these rules.

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