Accounting for Stock Options

Paper Summary:

This paper analyzes developments in the accounting field for stock options regulating standards. The writer shows how the accounting technique caused huge controversy among regulators and academics with respect to the treatment of stock options in the financial statements because the primary objective of decision usefulness of financial reporting as well as net income depends on whether or not the company recognises stock options as expenses on a fair value based method in the income statements. It argues that although the recent developments of the accounting standards proceed in the right direction, there are still issues that must be addressed. It shows that in order to solve the remaining issues, it is necessary to improve the qualitative aspects of financial information, such as relevance, reliability and comparability which directly relate to the primary objective of financial reporting.

1 Introduction
2 Historical Developments on Accounting for Stock Options
2.1 APB 25: Intrinsic Value
2.2 SFAS 123: Introduction of Fair Value Based Method
2.3 SFAS 148: More Timely and More Prominent Disclosure
3 Theoretical Analysis
3.1 Fundamentals of Financial Reporting
3.1.1 Objective of Financial Reporting
3.1.2 Qualitative Characteristics of Accounting Information
3.2 Recognition of Expense
3.2.1 What Is an Expense?
3.2.2 Assets under SFAC 6
3.2.3 Liabilities under SFAC
3.2.4 Assets under Exit Value Accounting
3.2.5 Liabilities under Exit Value Accounting
3.2.6 Comparison of the Recognitions
3.3 Measurement
3.3.1 Fair Value Method
3.3.2 Intrinsic Value Method
3.4 Summary of Theoretical Analysis
4 Practical Analysis - Cisco Systems, Inc.
4.1 About Cisco Systems, Inc.
4.2 Applications to the Accounting Standards
4.3 Pro Forma Disclosure in the Profit and Loss Statement
4.4 Market Share Price and Employees Stock Option Incentives
4.5 A Need for Change
5 Conclusion
6 Bibliography
Appendix

From the Paper:

"High-tech companies such as Cisco Systems have developed as major global business players during the last decade. One of the devices that many of these companies often applied in the process of their economic growth was a stock-based compensation plan. Such small venture businesses, which were normally deficient in cash in their initial stages, provided employees with the right to purchase their own stocks instead of cash. As a result, stock options could enormously reduce the amount of cash and wage expenses at the same time. Further, entrepreneurs could effectively retain talented staffs by granting them stock options, and could elevate motivation among the employees. However, the series of frauds and corporate crisis over the past year raised the question of accounting treatment for stock options whether the present standards achieve the principal objective of decision usefulness of financial reporting."

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