The Controversies of Accounting for Employee Stock Options:
A Historical and Theoretical Review
Abstract
In this paper, using a combined method of historical and theoretical analyses, we investigate the controversial accounting treatment of employee stock options (ESOs) by the financial accounting standard board (FASB) and the securities and exchange commission (SEC) in the U.S. We first review the standard setting history of ESOs and then discuss the pros and cons of expensing ESOs which is the current accounting practice. This helps understand why so much controversy existed on the current accounting treatment. Next, we propose four alternative classifications of SOEs and analyze each of them using the financial accounting standards board (FASB) conceptual framework. The arguable vague classification of ESOs in the current conceptual framework contributes to these controversies. Finally, we raise several empirical testing questions whose answers may help guide for future standard setting of ESOs. This paper contributes to the literature of accounting standard setting by critiquing the current practice. We believe it is beneficial to keep other solutions open for future discussion
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References
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Apostolou, N. G., & Crumbley, D. L. (2005, Agustus). Accounting for stock options. The CPA Journal. http://archives.cpajournal.com/2001/0500/features/f053401.htm.
Balsam, S. (1994, Desember). Extending the method of accounting for stock appreciation rights to employee stock options. Accounting Horizons, 8(4), 52-60.
Barth, M., Rodgers, T. J., Eichen, S. P., Morgan, J. F., Saldich, R. J., McCann, C., & Burton, J. C. (1994, Januari-Februari). Taking account of stock options. Accounting. https://hbr.org/1994/01/taking-account-of-stock-options.
Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362.
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Hegemann, S., & Ismailescu, I. (2017). The effect of FASB statement no. 123R on stock repurchases: An empirical examination of management incentives. Review of Pacific Basin Financial Markets & Policies, 20(2), 1750012. https://doi.org/10.1142/s0219091517500126.
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Mozes, H. A. (1998). The FASB’s conceptual framework and political support: The lesson from employee stock options. Abacus, 34(2), 141-161. https://doi.org/10.1111/1467-6281.00027.
Nordquist, K., & Ellingson, D. A. (1997). The controversy over accounting for stock options: A historical perspective. American Journal of Business, 12(2), 29-38. https://doi.org/10.1108/19355181199700011.
Nwogugu, M. (2004). Legal, economic and psychological issues of accounting for employee stock options. Managerial Auditing Journal, 19(8), 1079-1118. https://doi.org/10.1108/02686900410562759.
Porter, G. A., & Norton, C. L. (2007). Financial accounting: The impact on decision makers (5th ed.). Cengage Learning.
Rodgers, T. J., Eichen, S. P., Morgan, J. F., Saldich, R. J., Barth, M., McCann, C., & Burton, J. C. (1994, Januari-Februari). Taking account of stock options (pp. 32). Harvard Business Review. https://hbr.org/1994/01/taking-account-of-stock-options.
Sautner, Z., & Weber, M. (2011). Corporate governance and the design of stock option contracts. Die Betriebswirtschaft (Business Administration Review), 71, 331-354. https://doi.org/10.2139/ssrn.825429.
Scott, W. R. (2019). Financial accounting theory (8th ed.). Pearson Education.
Walters, M., & Young, J. (2008). Metaphors and accounting for stock options. Critical Perspectives on Accounting, 19(5), 805-833. https://doi.org/10.1016/j.cpa.2006.10.004.
Yermack, D. (1998). Companies’ modest claims about the value of CEO stock option awards. Review of Quantitative Finance & Accounting, 10, 207-226. https://doi.org/10.1023/a:1008299824396.
Aboody, D., Barth, M. E., & Kasznik, R. (2004b). Firms’ voluntary recognition of stock-based compensation expense. Journal of Accounting Research, 42(2), 123-150. https://doi.org/10.1111/j.1475-679x.2004.00132.x.
Akresh, M. S., & Fuersich, J. (1994). Stock options: Accounting, valuation and management issues. Management Accounting, 75(9), 51-53.
Apostolou, N. G., & Crumbley, D. L. (2005, Agustus). Accounting for stock options. The CPA Journal. http://archives.cpajournal.com/2001/0500/features/f053401.htm.
Balsam, S. (1994, Desember). Extending the method of accounting for stock appreciation rights to employee stock options. Accounting Horizons, 8(4), 52-60.
Barth, M., Rodgers, T. J., Eichen, S. P., Morgan, J. F., Saldich, R. J., McCann, C., & Burton, J. C. (1994, Januari-Februari). Taking account of stock options. Accounting. https://hbr.org/1994/01/taking-account-of-stock-options.
Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362.
Bischof, J., Daske, H., & Sextroh, C. J. (2020). Why do politicians intervene in accounting regulation? The role of ideology and special interests. Journal of Accounting Research, 58(3), 589-642. https://doi.org/10.1111/1475-679x.12300.
Cheatham, C., Cheatham, L. R., & McEacharn, M. (1995). ESOPs fable the goose that laid the golden eggs. The National Public Accountant, 40(4), 33.
Cortese-Danile, T. M., & Fitzsimons, A. P. (2006). SEC proposes changes to executive compensation disclosure requirements. Bank Accounting & Finance, 19(4), 44-60. https://www.econbiz.de/Record/sec-update-sec-proposes-changes-to-executive-compensation-disclosure-requirements-cortese-danile-teresa/10007270815.
Cron, W. R., & Hayes, R. B. (2004). Accounting for stock options: Measuring the real cost through time. American Journal of Business, 19(2), 13-22. https://doi.org/10.1108/19355181200400008.
Golden, J., & Kohlbeck, M. (2019). The unintended effects of financial accounting standard 123R on stock repurchase and dividend activity. Journal of Accounting, Auditing & Finance, 34(3), 411-433. https://doi.org/10.1177/0148558x17721087.
Hegemann, S., & Ismailescu, I. (2017). The effect of FASB statement no. 123R on stock repurchases: An empirical examination of management incentives. Review of Pacific Basin Financial Markets & Policies, 20(2), 1750012. https://doi.org/10.1142/s0219091517500126.
Holthausen, R. W., & Watts, R. L. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting & Economics, 31(1-3), 3-75. https://doi.org/10.1016/s0165-4101(01)00029-5.
Kim, J., & Graskamp, E. (2006, 3 Maret). Why stock options still make sense (pp. 1-5). Financial Executives International. https://www.fwcook.com/content/Documents/Publications/FEI_kim-graskamp_article_march_2006.pdf.
Miller, P., & Bahnson, P. (2006, 18 September-1 Oktober). Accounting enables compensation addiction. Accounting Today. https://www.accountingtoday.com/magazine.
Mozes, H. A. (1998). The FASB’s conceptual framework and political support: The lesson from employee stock options. Abacus, 34(2), 141-161. https://doi.org/10.1111/1467-6281.00027.
Nordquist, K., & Ellingson, D. A. (1997). The controversy over accounting for stock options: A historical perspective. American Journal of Business, 12(2), 29-38. https://doi.org/10.1108/19355181199700011.
Nwogugu, M. (2004). Legal, economic and psychological issues of accounting for employee stock options. Managerial Auditing Journal, 19(8), 1079-1118. https://doi.org/10.1108/02686900410562759.
Porter, G. A., & Norton, C. L. (2007). Financial accounting: The impact on decision makers (5th ed.). Cengage Learning.
Rodgers, T. J., Eichen, S. P., Morgan, J. F., Saldich, R. J., Barth, M., McCann, C., & Burton, J. C. (1994, Januari-Februari). Taking account of stock options (pp. 32). Harvard Business Review. https://hbr.org/1994/01/taking-account-of-stock-options.
Sautner, Z., & Weber, M. (2011). Corporate governance and the design of stock option contracts. Die Betriebswirtschaft (Business Administration Review), 71, 331-354. https://doi.org/10.2139/ssrn.825429.
Scott, W. R. (2019). Financial accounting theory (8th ed.). Pearson Education.
Walters, M., & Young, J. (2008). Metaphors and accounting for stock options. Critical Perspectives on Accounting, 19(5), 805-833. https://doi.org/10.1016/j.cpa.2006.10.004.
Yermack, D. (1998). Companies’ modest claims about the value of CEO stock option awards. Review of Quantitative Finance & Accounting, 10, 207-226. https://doi.org/10.1023/a:1008299824396.
Published
2025-05-07
How to Cite
LIU, Xiang; HAN, Yongliang Stanley.
The Controversies of Accounting for Employee Stock Options:.
Journal of Accounting, Business and Management (JABM), [S.l.], v. 32, n. 1, p. 159-171, may 2025.
ISSN 2622-2167.
Available at: <https://journal.stie-mce.ac.id/index.php/jabminternational/article/view/1233>. Date accessed: 08 may 2025.
doi: https://doi.org/10.31966/jabminternational.v32i1.1233.
Section
Articles
