Valuing the Reload Features of Executive Stock Options

P. Jane Saly; Ravi Jagannathan; Steven J. Huddart

doi:10.2308/acch.1999.13.3.219

Valuing the Reload Features of Executive Stock Options

Accounting Horizons ◽

10.2308/acch.1999.13.3.219 ◽

1999 ◽

Vol 13 (3) ◽

pp. 219-240 ◽

Cited By ~ 16

Author(s):

P. Jane Saly ◽

Ravi Jagannathan ◽

Steven J. Huddart

Keyword(s):

Option Pricing ◽

Stock Options ◽

Accounting Standards ◽

Financial Accounting ◽

Executive Stock Options ◽

Pricing Model ◽

Financial Accounting Standards Board ◽

Option Pricing Model

For options with a reload feature, the holder is automatically entitled to new options when the initial option is exercised. Under Statement of Financial Accounting Standards No. 123, the grant date value of executive stock options excludes the value of a reload feature because the Financial Accounting Standards Board believes it is not feasible to value a reload feature at the grant date. We show how the Binomial Option Pricing Model can be used to value options and the reload feature at the grant date. Ignoring the reload can substantially understate the value of the option. Accordingly, the Financial Accounting Standards Board may wish to reconsider the accounting for reload features.

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A Note On Accounting For Employee Stock Options When Reporting Diluted Earnings Per Share Under The Treasury Stock Method

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v6i10.2477 ◽

2011 ◽

Vol 6 (10) ◽

Author(s):

David T. Doran

Keyword(s):

Stock Options ◽

A Priori ◽

Market Price ◽

Accounting Standards ◽

Fair Value ◽

Financial Accounting ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Earnings Per Share ◽

Free Environment

Firms must currently apply the fair value method in determining the amount of employee compensation incurred in the case of employee stock options.  Current GAAP also requires that for purposes of calculating diluted earnings per share (EPS), the treasury stock method be applied where the assumed proceeds from exercise of the optioned shares is used to purchase shares of the firm’s stock at its average market price of the earnings period.  These incremental shares increase the denominator for purposes of calculating diluted EPS.  These requirements are consistent across the pronouncements of the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).  This study extends the work of Doran (2005) and Doran (2008).  These previous studies found that applying the treasury stock method where shares are assumed purchased at the average for the period price (instead of end of year price) understates the number of incremental shares (the denominator), which overstates diluted EPS.  However, these previous works assumed that no shares were actually purchased for the treasury during the earnings period.  The FASB indicates one reason that the average for the period price is appropriate is because if treasury shares purchases were to occur, “the shares would be purchased at various prices, not at the price at the end of the period.”  This study tests the notion that the average for the period price is appropriate under circumstances where the firm actually purchases shares for the treasury at its average market price during the earnings period.  This paper employs a simple one period model that assumes a risk free environment with complete certainty.  The model allows comparison of computed EPS with an a priori known, correct amount.  Consistent with Doran (2005) and Doran (2008), the results here again indicate that assuming purchase of treasury shares at their average market price of the earnings period understates the EPS denominator which results in EPS overstatement.  Correct diluted EPS is derived when the shares assumed purchased under the treasury stock method are acquired at the higher period ending market price.

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Accounting for Stock Options

The Journal of Economic Perspectives ◽

10.1257/089533005775196714 ◽

2005 ◽

Vol 19 (4) ◽

pp. 115-134 ◽

Cited By ~ 16

Author(s):

Jeremy Bulow ◽

John B Shoven

Keyword(s):

Stock Options ◽

Accounting Standards ◽

Financial Statements ◽

Financial Accounting ◽

Financial Statement ◽

Financial Accounting Standards Board ◽

Public Companies ◽

Valuation Method ◽

History Of ◽

Reported Earnings

As public companies begin their new fiscal years, they are implementing a new and controversial Financial Accounting Standards Board (FASB, 2004) proposal for expensing stock options. Applied to 2003 and 2004, this rule would have slashed reported earnings of the Standard & Poor's 500 by 8.6 and 7.4 percent; the effect in the bubble years would have been more than twice as large. We describe the history of how these options have been expensed for financial statement purposes. We assess the new FASB approach and find that it is deeply flawed. The main purpose of the paper is to describe an alternative options expense valuation method, the Bulow-Shoven approach, that addresses these problems. Our approach is simpler than the new FASB methodology, less prone to earnings manipulation and more consistent with the way the rest of compensation is treated in financial statements.

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Accounting For Employee Stock Options With Service, Performance, And Market Conditions

Journal of Business Case Studies (JBCS) ◽

10.19030/jbcs.v9i1.7544 ◽

2012 ◽

Vol 9 (1) ◽

pp. 47

Author(s):

John F. Boschen ◽

Denise A. Jones ◽

Kimberly J. Smith

Keyword(s):

Stock Options ◽

Accounting Standards ◽

Service Performance ◽

Financial Accounting ◽

Creative Design ◽

Employee Stock Options ◽

Financial Accounting Standards Board ◽

Market Conditions ◽

Accounting Standard

The accounting for employee stock options has long been a subject of debate among executives, regulators, and standard-setters. The accounting standard passed by the Financial Accounting Standards Board (FASB) in 2004 allows for more creative design of these types of options. In this case, students learn about employee stock options with service, performance, and market conditions. They also learn how to value options with these conditions, and how to report them on company income statements under the new accounting guidance.

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Tratamiento contable de las stock options según la normativa contable internacional

Contaduría y Administración ◽

10.22201/fca.24488410e.2010.259 ◽

2010 ◽

Author(s):

ELENA MERINO MADRID ◽

REGINO BANEGAS OCHOVO ◽

JESÚS FERNANDO SANTOS PEÑALVER

Keyword(s):

Financial Reporting ◽

Stock Options ◽

Accounting Standards ◽

Financial Accounting ◽

International Accounting ◽

International Accounting Standards ◽

Financial Accounting Standards Board ◽

Reporting Standard ◽

International Financial Reporting Standard ◽

Ifrs 2

LA RETRIBUCIÓN QUE HACEN LAS EMPRESAS A SUS DIRECTIVOS Y EMPLEADOS MEDIANTE LA ENTREGA DE OPCIONES SOBRE ACCIONES (STOCK OPTIONS) SE HA CONVERTIDO EN UNA PRÁCTICA HABITUAL EN MUCHOS PAÍSES DEL MUNDO. HASTA FECHAS RECIENTES NO EXISTÍA UN CONSENSO SOBRE EL TRATAMIENTO CONTABLE QUE SE DEBÍA DAR A ESTE TIPO DE TRANSACCIONES; SIN EMBARGO, EN LA ACTUALIDAD PARECE QUE TAL CONSENSO SE HA ALCANZADO AL EXIGIR TANTO EL INTERNATIONAL ACCOUNTING STANDARDS BOARD (IASB) COMO EL FINANCIAL ACCOUNTING STANDARDS BOARD (FASB), EN LA INTERNATIONAL FINANCIAL REPORTING STANDARD, IFRS 2 (NIIF 2, NORMA INTERNACIONAL DE INFORMACIÓN FINANCIERA) Y STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) 123 (R) RESPECTIVAMENTE, QUE SE RECONOZCA LA REMUNERACIÓN BASADA EN LA ENTREGA DE OPCIONES SOBRE ACCIONES COMO UN GASTO EN LOS ESTADOS FINANCIEROS. EL OBJETIVO DE ESTE TRABAJO ES ANALIZAR EL TRATAMIENTO CONTABLE APLICABLE DE ACUERDO CON LA NORMATIVA CONTABLE INTERNACIONAL O DE INFORMACIÓN FINANCIERA (NIC/NIIF).

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Employee stock options and the flawed use of the Black–Scholes option pricing model

Journal of Corporate Accounting & Finance ◽

10.1002/jcaf.22456 ◽

2020 ◽

Author(s):

Louis P. Le Guyader ◽

Thomas O. Meyer

Keyword(s):

Option Pricing ◽

Stock Options ◽

Employee Stock Options ◽

Pricing Model ◽

Black Scholes ◽

Option Pricing Model

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Accounting For Stock Options: Comparison Of Alternative Approaches

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v16i3.2040 ◽

2011 ◽

Vol 16 (3) ◽

Author(s):

Gerald J. Lobo ◽

Joseph C. Rue

Keyword(s):

Stock Options ◽

Accounting Standards ◽

Market Value ◽

Static Model ◽

Financial Accounting ◽

Option Value ◽

Financial Accounting Standards Board ◽

Alternative Measures ◽

Alternative Approaches

The Financial Accounting Standards Board in Standard No. 123 requires the disclosure of the annual option expense assuming a market based static model is used to measure the option "value" at issue data. This study reviews and tests alternative measures of accounting for stock options that were previously proposed by the Board. Our results suggest the exercise date model provides a measure of option expense which more consistently reflexes the changes in the market value of the option.

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