Accounting For Stock Options: A Historical Perspective

In recent years stock options have become one of the most dominant and controversial forms of executive compensation. Stock options are controversial not only because of the sheer magnitude of some executive option grants, but also because of the method used to account for them. Currently, the fair value of stock options does not have to be reported as compensation expense on the income statement. Critics maintain this approach results in an inflated and misleading amount of reported net earnings. This paper addresses the role of stock options as an effective means of employee compensation and traces the historical development of the accounting treatment of stock options. In addition, the current reporting requirements for options are discussed along with recommendations for improving the manner in which stock options are accounted for.