An Alternative Method Of Accounting For Stock Options

Abstract

Currently, the grant date fair value of employee stock options is expensed over the vesting period. Our study introduces a new valuation approach for stock options and examines the impact of this change on earning per share (EPS) for a sample of firms over the period 2002-2011. The new valuation approach provides data useful to the Financial Accounting Standards Board (FASB) as it determines whether to revise the current option accounting rules. Under the proposed approach, options are valued at their intrinsic value on the grant date (i.e., the opportunity cost or the economic promise associated with the difference between the exercise price of the option and the market price of the stock at each measurement date) and further revalued each reporting date until the options are exercised.