Knowledge Bank

Employee stock option plans have been an important part of the compensation package offered to employee. The core issue related to employee stock options is how the plans should be valued on the financial statements. The 1972 Accounting Principles Board Opinion No. 25 and the recently released Statement of Financial Accounting Standards No. 123 both address the valuation issue. This paper studies the characteristics of APB 25 and SFAS 123 as well as their applications. The paper then offers a modified valuation approach which attempts to achieve the goal of providing better information on employee stock option plans to the users of financial statements.