Accounting for Employee Stock Options

2004 ◽  
Vol 18 (2) ◽  
pp. 135-156 ◽  
Author(s):  
Michael Kirschenheiter ◽  
Rohit Mathur ◽  
Jacob K. Thomas
Keyword(s):  
Stock Options ◽  
Financial Statements ◽  
Cash Flows ◽  
Stock Option ◽  
Share Price ◽  
Employee Stock Options ◽  
Deferred Taxes ◽  
Recommended Treatment ◽  
Option Values ◽  
The Common

Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options-as-equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to current equityholders by the pretax value of projected option grants. We show that these distortions can be avoided simply by accounting for options as liabilities at grant and thereafter recognizing changes in option values (similar to the accounting for stock appreciation rights). Our analysis of stock option accounting leads to two, more general implications: (1) all securities other than common shares should be treated as liabilities, thereby simplifying the equity versus liability distinction, and (2) these liabilities should be recorded at fair values, thereby obviating the need to consider earnings dilution.

scholarly journals EXECUTIVE STOCK OPTION PLANS: UJI PENGELOLAAN LABA SELAMA VESTING PERIOD

2018 ◽  
Vol 14 (4) ◽  
pp. 478-500
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Stock Options ◽  
Stock Exchange ◽  
Early Stage ◽  
Financial Statements ◽  
Stock Option ◽  
Share Price ◽  
Executive Stock Option ◽  
Grant Program ◽  
Final Sample ◽  
A Company

This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final

scholarly journals EXECUTIVE STOCK OPTION PLANS: UJI PENGELOLAAN LABA SELAMA VESTING PERIOD

2017 ◽  
Vol 14 (4) ◽  
pp. 478
Author(s):  
Nur Fadjrih Asyik
Keyword(s):  
Stock Options ◽  
Stock Exchange ◽  
Early Stage ◽  
Financial Statements ◽  
Stock Option ◽  
Share Price ◽  
Executive Stock Option ◽  
Grant Program ◽  
Final Sample ◽  
A Company

This study examine earnings management behavior related to compensation in the form of stock options during implementation of the grant program (vesting period). The study also examine and identify the differences in behavior during the execution of stock options. Companies as a sample in this study is a company listed in the Indonesia Stock Exchange, which has adopted the Executive Stock Option Plan and restricted to the companies that publish financial statements as of December 31 for the year 2007 to 2009. Final sample of this research into as many as 21 sample companies and the number of observations are 63 observational studies. The result of testing H1 shows that the more stock options offered to employees, the managers more motivated to manage earnings down prior to offering stock options. The results are consistent with previous studies of the behavior of managers who expect the share price decline before the date of grant, so the manager to pay compensation for stock options with a relatively cheap price. The results of testing H2a and H2b show that the more stock options offered to employees, the managers more motivated to manage earnings upward after offering stock options. Results show that an early stage implementation of executive stock option plans, executives trend to behave increasing income until vesting period final.

Espresso, Inc.: Analyzing the Impact of Employee Stock Options

2000 ◽  
Vol 15 (3) ◽  
pp. 513-534
Author(s):  
Susan E. Moyer ◽  
Susan G. Weihrich
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Financial Statements ◽  
Stock Option ◽  
Employee Stock Options ◽  
Flow Effects ◽  
The Impact ◽  
Subsequent Sale

This case explores the effects of stock option awards on companies and their employees. We examine how options likely affect employee wealth by considering tax and cash-flow effects of the grant and exercise of the option and of the subsequent sale of stock. We also examine how the company reports stockoption transactions in its financial statements and footnotes and how the options affect the company's tax return. These issues are investigated for both incentive stock options and nonqualified stock options. In addition, the case's setting presents the challenges of balancing employee and corporate objectives when structuring this increasingly common form of compensation.

EDGAR Extraction System: An Automated Approach to Analyze Employee Stock Option Disclosures

2006 ◽  
Vol 20 (2) ◽  
pp. 119-142 ◽  
Author(s):  
Gerry H. Grant ◽  
Sumali J. Conlon
Keyword(s):  
Stock Options ◽  
Financial Statements ◽  
Relevant Information ◽  
Stock Option ◽  
Financial Statement ◽  
Automated System ◽  
Extraction System ◽  
Specific Information ◽  
Employee Stock Options ◽  
Employee Stock Option

Past alternative accounting choices and new accounting standards for stock options have hindered analysts' ability to compare corporate financial statements. Financial analysts need specific information about stock options in order to accurately assess the financial position of companies. Finding this information is often a tedious task. The SEC's EDGAR database is the richest source of financial statement information on the Web. However, the information is stored in text or HTML files making it difficult to search and extract data. Information Extraction (IE), the process of finding and extracting useful information in unstructured text, can effectively help users find vital financial information. This paper examines the development and use of the EDGAR Extraction System (EES), a customized, automated system that extracts relevant information about employee stock options from financial statement disclosure notes on the EDGAR database.

SFAS No. 123 Disclosures and Discounted Cash Flow Valuation

2000 ◽  
Vol 14 (2) ◽  
pp. 169-189 ◽  
Author(s):  
Leonard C. Soffer
Keyword(s):  
Cash Flow ◽  
Stock Options ◽  
Stock Option ◽  
Financial Statement ◽  
Employee Stock Options ◽  
Financial Statement Analysis ◽  
Discounted Cash Flow ◽  
Employee Stock Option ◽  
Valuation Technique ◽  
Discounted Cash Flow Valuation

One of the cornerstones of financial statement analysis is the discounted cash flow valuation. Despite the broad use of this valuation technique, and the economic importance of employee stock options to firm values, there is little guidance on how employee stock options should be incorporated in a valuation. This paper provides a comprehensive approach to doing so, including consideration of the income tax implications of option exercises, the simultaneity of equity and option valuation, and the use of the disclosures that were mandated recently by Statement of Financial Accounting Standards No. 123. The paper provides a comprehensive example using Microsoft's fiscal 1997 financial statements and employee stock option disclosure. This paper should be of interest to academics and practitioners involved in corporate valuation and financial statement analysis.

THE EFFECTS OF FIRM CHARACTERISTICS AND RECOGNITION POLICY ON EMPLOYEE STOCK OPTIONS PRICES AFTER CONTROLLING FOR SELF-SELECTION

2014 ◽  
Vol 09 (02) ◽  
pp. 1440003
Author(s):  
CHII-SHYAN KUO ◽  
SHIH-TI YU
Keyword(s):  
Firm Value ◽  
Threshold Model ◽  
Stock Option ◽  
Share Price ◽  
Employee Stock Options ◽  
Firm Characteristics ◽  
Employee Stock Option ◽  
Large Size ◽  
Self Selection ◽  
Recognition Rule

We examine whether and how firm characteristics, including firm size and liquidity, affect the relation between employee stock option (ESO) grants (as proxied by disclosed ESO expenses) and firm value. We also investigate how the implementation of a new share-based compensation recognition rule affects the pricing effect of ESOs. Prior studies have provided mixed results concerning how ESOs affect firm value. We argue that their findings could be attributable to self-selection and a non-uniform ESO-share price relation. We use the threshold model to address our research questions after controlling for self-selection bias. We find that markets tend to positively price ESOs in the case of firms characterized by large size and low liquidity. In addition, we find that after the new rule came into effect, ESOs became positively associated with firm value. These results are congruent with ownership and symbolic value theories, the lifecycle stages hypothesis and the contention that an ESO expensing policy enhances the quality of financial statements.

scholarly journals The Effects of Employee Stock Options on Credit Ratings

2008 ◽  
Vol 83 (5) ◽  
pp. 1273-1314 ◽  
Author(s):  
Yen-Jung Lee
Keyword(s):  
Stock Options ◽  
Credit Rating ◽  
Credit Ratings ◽  
Fair Value ◽  
Cash Flows ◽  
Share Repurchases ◽  
Credit Rating Agencies ◽  
Employee Stock Options ◽  
Rating Agencies ◽  
Unfavorable Effect

ABSTRACT: This paper examines whether outstanding employee stock options (ESOs), which represent the firm’s contractual obligation to deliver shares upon ESO exercise, affect firms’ credit ratings. I hypothesize that outstanding ESOs play two information roles—(1) suggesting equity infusion, and (2) predicting share repurchases—that help credit-rating agencies evaluate the issuing company’s debt service ability. Consistent with these hypothesized roles, results indicate that the present values of expected cash proceeds and tax benefits from ESO exercise have favorable effects on credit ratings. In contrast, the present value of the expected cost of ESO-related share repurchases has an unfavorable effect on credit ratings and this unfavorable effect is more pronounced for firms with a greater tendency to repurchase shares. The after-tax fair value of outstanding ESOs, which summarizes the effects of the above three ESO-related cash flows, is negatively associated with credit ratings. Taken together, these findings are consistent with credit-rating agencies incorporating the information conveyed by outstanding ESOs regarding potential equity infusion and ESO-related repurchases in their credit risk assessments and assigning lower credit ratings to firms with greater values of outstanding ESOs.

The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives

2017 ◽  
Vol 20 (02) ◽  
pp. 1750012 ◽  
Author(s):  
Steven Hegemann ◽  
Iuliana Ismailescu
Keyword(s):  
Stock Options ◽  
Stock Option ◽  
Stock Repurchases ◽  
Share Repurchases ◽  
Employee Stock Options ◽  
Empirical Examination ◽  
Negative Relation ◽  
Management Incentives ◽  
Reported Income

This study examines management’s response to the change in accounting for stock option-based compensation imposed by SFAS No. 123R, whose implementation is expected to reduce reported income. To cope with this impact, management may be motivated to decrease the use of stock options as part of compensating employees and engage in stock repurchases in an attempt to increase the value of outstanding employee stock options. Our findings demonstrate a significant negative relation between stock options granted and shares repurchased in the aftermath of SFAS No. 123R, particularly for the S&P 500 firms known for their heavy use of employee stock options. Furthermore, evidence of a contemporaneous increase in repurchases and leverage in the post SFAS 123R period may suggest that some of the buybacks may have been funded with debt. Our findings are robust to the inclusion of traditional determinants of share repurchases.

Discretionary Reporting of Stock Options by IPO Firms

2005 ◽  
Vol 19 (4) ◽  
pp. 223-236 ◽  
Author(s):  
Joseph D. Beams ◽  
Anthony J. Amoruso ◽  
Frederick M. Richardson
Keyword(s):  
Initial Public Offering ◽  
Stock Price ◽  
Stock Options ◽  
Peer Group ◽  
Price Volatility ◽  
Fair Value ◽  
Employee Stock Options ◽  
Public Companies ◽  
Option Values ◽  
Public Offering

The revision of SFAS No. 123 (SFAS No. 123R, FASB 2004) requires companies to recognize the fair value of employee stock options. In addition, nonpublic companies will no longer be permitted to assume stock price volatility of zero when calculating the fair value of their stock options. This study finds that the zero volatility assumption allowed under the original version of SFAS No. 123 (FASB 1995) resulted in an average estimated fair value of options that was $1.06 (40 percent) less than the fair value calculated using a peer group volatility estimate for firms undergoing an initial public offering (IPO). However, IPO firms that estimated their volatility underreported option values by an even larger magnitude than the group using the zero volatility assumption. Perhaps these firms reported a downward-biased estimate of volatility to inhibit analysts from computing option values using more reasonable volatility estimates. Contrary to the findings for public companies, we find that a large percentage of sample firms issued in-the-money options prior to going public. Following the IPO, only a small portion of firms issued in-the-money options. The concerns regarding recognizing option expense may be less important than the benefits of granting in-the-money options for IPO firms.

Do Stock-Based Compensation Deferred Tax Assets Provide Incremental Information about Future Tax Payments?

2015 ◽  
Vol 38 (1) ◽  
pp. 79-102 ◽  
Author(s):  
Derek Johnston ◽  
Lisa Kutcher
Keyword(s):  
Stock Options ◽  
Cash Flows ◽  
Employee Stock Options ◽  
Negatively Associated ◽  
Deferred Tax Assets ◽  
Incremental Information ◽  
Restricted Stock ◽  
Tax Payments ◽  
Deferred Tax ◽  
Jel Classifications

ABSTRACT We explore whether an accounting treatment similar to that required under IFRS improves the ability of the stock-based compensation component of deferred tax assets to predict future tax payments, relative to U.S. GAAP. Using hand-collected data for S&P 500 firms, we estimate the deferred tax assets related to employee stock options (ESOs) and restricted stock units (RSUs). We find that the RSU deferred tax asset is negatively related to future cash tax payments, while we fail to find that the ESO deferred tax asset is. However, after reducing the ESO and RSU deferred tax assets by their corresponding estimated impairments, we find that both variables are negatively associated with future tax payments. Additional analysis provides evidence that supports the conjecture that using a revaluation approach to account for stock-based compensation deferred tax assets may be more useful in predicting future tax cash flows, relative to current U.S. GAAP. JEL Classifications: H25; M41.

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