FASB 123 - Accounting for Stock Options.
When people think of business and business practices one thought that comes to mind is money. Money is the biggest driving force for a business to be successful. With all the transactions that take place in a business, whether that business be a large corporation or a small "Mom and Pop" store, keeping track of all the flows of money can get immensely complex. That is why we have created agencies to set standards so proper accounting practices will be performed. Two of these agencies are the Securities and Exchange Commission (SEC), set up by our federal government, and the privately created, Financial Accounting Standards Board (FASB). The standards the FASB creates are known as Generally Accepted Accounting Principles (GAAP). When an accounting controversy arises accounting agencies will step in to help solve the problem. .
One accounting issue that was prominent in the late 1980s and early 1990s was, accounting for employee stock-based compensation or stock options. Today the accounting statement made by FASB, number 123 - Accounting for Stock-Based Compensation, is the most recent addition on how to account for stock options. But before the FASB issued this statement there were many questions, concerns, and changes of how stock options were accounted for. To better understand what Statement of Financial Accounting Standards (SFAS) No. 123 is and how it came about, the events that led up to the issuance of SFAS 123 will be identified. Also it is important to understand why the FASB sets accounting standards for the U.S. instead of the SEC, which has the ultimate power in setting rules and standards.
To first begin, employee stock options give them the option to purchase the business's stock and in a later period, employees hope to exercise these options at a higher price than the grant date. The holder of these options usually must hold stock options five to ten years from the grant date before being exercised (Mozes, p.