Stock options

Another subject that was particularly controversial in the 1990s was the practice, very common in certain industries, of rewarding management by giving them options to buy shares at interesting prices in exchange for meeting targets or staying with the employer through a difficult period, etc. One of the reasons for the attractiveness of this payment method was that there was no impact on the income statement. The shares were issued when they had vested (i.e. the employee had fulfilled the conditions) and the employee wanted to exercise the option. This transaction appeared as a sale of equity and was mentioned only in the analysis of changes in equity.

Companies argued that this was a transaction between equity holders and management and not between the company and management, and therefore there was no reason to recognize an expense. Standard-setters argued that issuing equity was no different from paying cash – the recipient received an asset that gave them future benefits – so the issue of the equity was an expense. The FASB had had difficulties with this area in the 1990s and when the IASB started work in 2001 it decided that issuing an international standard would be a demonstration of the utility of having an international standard-setter. Where national standard-setters faced the argument that they were putting their national companies at a competitive disadvantage if they took the initiative, the IASB could show leadership without these constraints.

Consequently ...

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