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Accounting for Stock Options

Jeremy Bulow, John B Shoven
2005 Journal of Economic Perspectives  
Employee stock options di¤er substantially from traded options. Most expire within 90 days of the termination of employment, and are forfeited if the employee leaves before vesting. The major accounting standards boards are in agreement that options should be expensed, but companies have legitimate complaints about the proposed methods. For example, the proposals create accounting incentives for ...rms to lay o¤ employees who hold unvested and nearly worthless options. We propose a simple
more » ... pose a simple accounting system, based on 90 day option prices, that addresses these legitimate objections. The system produces objective, transparent, and decision-relevant information. Firms are given signi...cant ‡exibility regarding the amortization of unvested option expense. This ‡exibility is created, without distorting incentives, by our use of market-based prices whenever an option expense is recognized.
doi:10.1257/089533005775196714 fatcat:4wx5d7wzp5afjot26yvqaqg5ni