ACCOUNTING FOR EMPLOYEE STOCK OPTIONS: A PRACTICAL APPROACH TO HANDLING THE VALUATION ISSUES

Abstract

Journal of Derivatives AccountingVol. 01, No. 01, pp. 3-9 (2004) ArticlesNo AccessACCOUNTING FOR EMPLOYEE STOCK OPTIONS: A PRACTICAL APPROACH TO HANDLING THE VALUATION ISSUESJOHN HULL and ALAN WHITEJOHN HULLJoseph L. Rotman School of Management, University of Toronto, 105 St George Street, Toronto, ON M5S 3E6, Canada Search for more papers by this author and ALAN WHITEJoseph L. Rotman School of Management, University of Toronto, 105 St George Street, Toronto, ON M5S 3E6, Canada Search for more papers by this author https://doi.org/10.1142/S0219868104000026Cited by:12 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractIn this paper we argue that employee stock options should be expensed on the grant date and then marked to market on subsequent reporting dates. One of the advantages of our approach is that the cumulative amount expensed for a stock option over the whole of its life does not depend on the option pricing model used. The option pricing model influences only the way in which expenses are allocated to time periods. Our paper proposes an option pricing model appropriate for employee stock options. The model explicitly considers the vesting period, the possibility that employees will leave the company during the life of the option, the inability of employees to trade their options, and dilution issues.Keywords:Optionsstockemployeesaccountingvaluation References L. Booth, Canadian Investment Review (2003). Google ScholarJ. Carpenter, Journal of Financial Economics 48(2), 127 (1998). Crossref, Google ScholarJ. C. Cox, S. Ross and M. Rubinstein, Journal of Financial Economics 7, 224 (1979). Google Scholar Financial Accounting Standards Board (1995). FASB 123: Accounting for Stock-Based Compensation . Google ScholarD. Galai and M. Schneller, Journal of Finance 33(5), 1333 (1978). Crossref, Google ScholarS. Huddart, Journal of Accounting and Economics 18, 207 (1994). Crossref, Google ScholarS. Huddart and M. Lang, Journal of Accounting and Economics 21(1), 5 (1996). Crossref, Google Scholar J. C. Hull, Options, Futures and Other Derivatives, 5th edn. (Prentice Hall, NJ, 2003). Google Scholar Hull, J. C. and A. White (2004). How to value employee stock options. Financial Analysts Journal, forthcoming . Google Scholar International Accounting Standards Board (2002). ED 2: Share-Based Payment . Google ScholarM. Rubinstein, Journal of Derivatives 3(1), 8 (1995). Crossref, Google Scholar FiguresReferencesRelatedDetailsCited By 12Transaction Costs, Option Prices, and Model Risk in Fair Value AccountingLoïc Belze, François Larmande and Lorenz Schneider2 July 2019 | European Accounting Review, Vol. 29, No. 2Fulfillment of IFRS 2 Disclosure Requirements by Companies Listed on the Prague Stock ExchangeMartin Červený11 Dec 2018 | European Financial and Accounting Journal, Vol. 12, No. 3The Market Valuation of the Permanent Book-to-Tax Differences Generated by Stock-Based Compensation AwardsJames D. Brushwood, Derek Johnston and Lisa Kutcher1 Sep 2017 | Journal of the American Taxation Association, Vol. 39, No. 2Pricing Model Management: Evidence from Employee Stock Option (Un)Fair ValuationLooc Belze, Francois Larmande and Lorenz Schneider1 Jan 2015 | SSRN Electronic Journal, Vol. 11An expanded model for the valuation of employee stock optionsFeng-Yu Liao and Yuh-Dauh Lyuu1 Aug 2009 | Journal of Futures Markets, Vol. 29, No. 8The incentive effect of repricing in employee stock optionsYan Wendy Wu20 Feb 2009 | Review of Accounting and Finance, Vol. 8, No. 1Valuing Multiple Employee Stock Options Issued by the Same CompanyPatrick J. Dennis and Richard J.. Rendleman31 August 2008 | The Journal of Derivatives, Vol. 16, No. 1Valuation of Performance‐Dependent OptionsThomas Gerstner and Markus Holtz1 Feb 2008 | Applied Mathematical Finance, Vol. 15, No. 1Executive Stock Options and Concavity of the Option PricePhelim P Boyle and William R. Scott31 May 2006 | The Journal of Derivatives, Vol. 13, No. 4EXECUTIVE STOCK OPTIONS: A FIRM VALUE APPROACHPHELIM BOYLE and WEIDONG TIAN7 April 2012 | Journal of Derivatives Accounting, Vol. 02, No. 02ACCOUNTING FOR EMPLOYEE STOCK OPTIONS AND MANDATORY EXPENSING: AN ECONOMICS PERSPECTIVEJUNNING CAI7 April 2012 | Journal of Derivatives Accounting, Vol. 02, No. 02Indexed Underlying Price OptionsMárton Radnai1 Jan 2005 | SSRN Electronic Journal, Vol. 57 Recommended Vol. 01, No. 01 Metrics History KeywordsOptionsstockemployeesaccountingvaluationPDF download