Acc 499 Stock Option Paper

Martine Joseph

Stock Option

ACC499

Professor Brandy Havens

According to the Financial Accounting Standards Board (FASB) the compensation cost should be measured at a point wherein it qualifies as a liability or an equity instrument at the grant date. Carmichael, Whittington, and Graham (2007) stated that compensation cost is based on the stock price at the date of grant (p. 39) which occurs after a mutual understanding is obtained and the company is oblige to grant equity or transfer asset, along with all the needed approvals. Compensation cost must be based on the underlying stock price “at the date the terms of a stock-based award are agreed to by the employer and the employee (p. 39).

Compensation cost can be measured by obtaining the market value of the principal stock at the date of grant since compensation cost is usually based on the market value of the particular stock. By obtaining the market value of the stock which is equal to the fair value, it is possible then to measure the compensation cost because under statement 123 of the FASB, compensation cost is measured through the value of the award on the grant date during the vesting period.

Compensation expense for employees can be measured for the stock option plan in 2009 through the stock price that enters into measurement of the fair value of an award at the grant date. Compensation expense for stock option plan after 2009 can be measured through the fair value using an option-pricing model by taking the stock price into account at the date grant. As mentioned earlier, measurement of compensation expense is based on the underlying stock price. That is, the compensation expense can be measured based on reasonable facts and assumptions on the grant date such as the vesting period of the grant, the average length of time similar grants have remained outstanding, and the historical and expected volatility of the underlying stock.

The effect of forfeiture of the stock options on...