|Stock Options Overview
To understand this problem we have to review what a stock option is. Typically options are a right to buy a stock at a certain price. Many employees of companies, especially company officers receive a large amount of stock options as part of their pay. The main objective is to encourage the employee's to make the company money and in exchange their stock options will be worth more.
Stock options are beneficial to a company for three reasons. The first is that the align employee goals with the company's overall goals. The second is that stock options are low risk; the company doesn't lose as much if its performance has been bad. The third is cash flow; the company does not actually have to find cash to pay the employees.
The Valuation Rules of the 1990's
In 1993 the FASB attempted to create Statement of Financial Accounting Standard (or SFAS) 123. This would require companys to record stock options as an expense based on their fair market value from the day they were granted. This seems to be a most logical way to account for stock options since it records the opportunity cost of not selling the stock options on the open market and instead giving them away to employees. Unfortunately, tech industry lobbyist and ...