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What Is Stock Option Expensing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2016
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    2003-2016
    Conjecture Corporation
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Stock option expensing is a process that is often used in order to track the current value of different types of shares issued by a company, especially when those shares are issued to employees as part of an incentive or retirement plan. The idea is to account for the value of those shares on the accounting reports maintained by the company, such as the profit and loss statement and the company balance sheet. Typically, this is done by accounting for the differences that may exist between the exercise price of the shares and the current market price, carrying the expensing as either a profit or a loss.

Proponents of the stock option expensing method see this approach as a means of providing full disclosure in accounting records. Since the expensing is supported with entries found on the company balance sheet, the income statement for the period under consideration, and even the cash flow statement, there can be no real question regarding the status of those stock options and how they relate to the current financial picture of the company. The degree of detail involved can also be used to explain how the number of shares provided to employees were determined as well as how the value of those shares was calculated.

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While many businesses make use of stock option expensing, there are opponents to the concept. While there is usually not any objection on the grounds that using this method as a means of cooking the books is a possibility, there is often a focus on the redundant nature of the process. Those who oppose the utilization of stock option expensing see it as creating additional work when it is not necessary. All the data relevant to the options is already captured with other entries, making the creation of further entries on different types of reports nothing more than a repetition. From this perspective, the objection hinges mainly on matters of time management and keeping the accounting records relatively free of entries that serve the same purpose as other entries.

The use of stock option expensing may be a matter of personal preference, as long as the accounting records are in compliance with any governmental regulations that have to do with disclosure or the government’s interpretation of generally accepted accounting principles. This means that when determining whether or not to make use of stock option expensing, companies should consult accounting professionals to determine if that usage will comply with governmental regulations and how that usage would benefit the company overall. Once that determination has been made, the company can move forward with tracking the data related to those stock options in whatever manner is considered in compliance.

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