In today's economic stakes, it is essential and imminent that businesses produce growth reflecting in the financial reports. Businesses will think up every way possible to conceal the notorious category of "expense". Companies will invent gimmicks and strategies to create the best looking financial statements for their best interest. Essentially granting stock options to employees is a way to retain key personnel within the company. It is an incentive and compensation for employees to work harder and creating a sense of ownership. Many larger corporations tend to use this form of compensation to promote more efficient employees which is beneficial but there are many issues and risks behind the scenes which caused a decade of debate.
The idea of granting share options seems very lucrative to many corporations and employees, which it very well is. But how does a company treat the very scheme in accounting terms? Where it counts. Essentially, issuing shares is an act of capitalization of the business rather than a cost or an expense of the company. So under the accounting rules it does not have to be included in the company's income statements and many companies let this go unrecognized. The effect of this act will be that profits are overstated and the true value of the company will not be seen on the financial statements. This will lead potential and existing shareholders into distorted information of their invested company. Holliday (2002) stated that:.
"Alan "The Fireman" Greenspan (so-called by Mark Anderson because he dosed the hot economy in 2001), went on a tirade against corporate accounting practices relating to treatment of stock options. He believes that the true value of a company is being artificially increased by not expensing the "cost" of disbursing stock options.".
So, is granting stock options a cost or capital exercise of a business? Granting stock options is form of employee compensation and therefore it should be recognized in the income statements.