Stock Options Case
The purpose of this case study is to discuss the issues related to stock options and how they should be accounted for.
Introduction
In the early 1990s, FASB proposed an accounting rule calling for corporations to recognize compensation expense for certain stock options when they were granted to executives and employees. This proposal was met with strong opposition from many different sources including: Congress who passed a resolution by vote urging FASB to drop the proposed standard, business executives who stood to lose the most, and even the accounting firms who were accused of lobbying for their largest clients. New issues were raised over the controversy. Among these issues was whether accounting firms undermined the integrity and credibility of the independent audit function when they lobbied on behalf of controversial positions supported by their audit clients and whether …show more content…
It was replaced with Statement of Financial Accounting Standards No. 123 which only encouraged companies to recognize compensation expense for compensatory stock options that have an exercise prices higher then the stock price on the grant date. Companies are also permitted to only simply disclose this information in the financial statement footnotes. Most companies used the disclosure and FASB was still criticized.
Epilogue
Due to many newly emerging firms relying on stock option grants to recruit high powered executives, stock rose sharply and fueled investor’s expectations regarding the future prospects of these companies. Alan Greenspan warned investors that the stock market was being affected by “irrational exuberance” and the stock prices of these companies soon plummeting in 2000. The scandals involving Enron, WorldCom, and other high-tech companies fueled the decline of investor confidence and the sharp sell-off of stock.
Many business journalists blamed the stock option mania for the accounting
Introduction
In the early 1990s, FASB proposed an accounting rule calling for corporations to recognize compensation expense for certain stock options when they were granted to executives and employees. This proposal was met with strong opposition from many different sources including: Congress who passed a resolution by vote urging FASB to drop the proposed standard, business executives who stood to lose the most, and even the accounting firms who were accused of lobbying for their largest clients. New issues were raised over the controversy. Among these issues was whether accounting firms undermined the integrity and credibility of the independent audit function when they lobbied on behalf of controversial positions supported by their audit clients and whether …show more content…
It was replaced with Statement of Financial Accounting Standards No. 123 which only encouraged companies to recognize compensation expense for compensatory stock options that have an exercise prices higher then the stock price on the grant date. Companies are also permitted to only simply disclose this information in the financial statement footnotes. Most companies used the disclosure and FASB was still criticized.
Epilogue
Due to many newly emerging firms relying on stock option grants to recruit high powered executives, stock rose sharply and fueled investor’s expectations regarding the future prospects of these companies. Alan Greenspan warned investors that the stock market was being affected by “irrational exuberance” and the stock prices of these companies soon plummeting in 2000. The scandals involving Enron, WorldCom, and other high-tech companies fueled the decline of investor confidence and the sharp sell-off of stock.
Many business journalists blamed the stock option mania for the accounting