Accountants' Handbook Volume Two: Special Industries and Special Topics, Eleventh Edition

Chapter 39. STOCK-BASED COMPENSATION

Peter T. Chingos CPA

Mercer Human Resources Consulting

Walton T. Conn Jr., CPA

KPMG Peat Marwick LLP

John R. Deming CPA

KPMG Peat Marwick LLP

HISTORY OF ACCOUNTING FOR STOCK-BASED COMPENSATION

The nature and types of stock-based compensation plans and awards have constantly changed over the years. However, the two most significant problems in determining the appropriate accounting for such awards have remained the same:

1. Measurement of compensation cost (i.e., the determination of total compensation cost to be allocated to expense for financial reporting purposes)

2. Allocation of compensation cost (i.e., the determination of the period(s) over which total compensation cost should be allocated to expense and the method of allocation)

To be sure, employees are compensated by being awarded stock options when they contribute services. However, their employers do not incur any cost in compensating them that way, any more than they do in issuing previously unissued shares of their stock when they receive money from new stockholders. The preexisting stockholders are the ones who incur a cost when employees are awarded stock options, first a cost of contingent dilution of their ownership interest and later a cost of actual dilution of their ownership interest. A reporting entity should report the costs it incurs, not costs other entities incur. Ironically, after centering its consideration of reporting in connection with the awarding of employee stock options on ...