144). Since no stock has been actually issued before the exercise date and since a company's stock price is always changing, complex accounting problems result. Some accounting issues that surround employee stock options are: When to recognize compensation expense? How much compensation expense should be recorded? And what should and should not be disclosed on the income statement? Since the 1970s these questions have tried be answered. .
In 1972, the first solution for accounting for employee stock options came from the AICPA, Accounting Principles Board Opinion No. 25 (Mozes, p. 144). Opinion No. 25 stated that:.
" [Stock option] expense is measured by the excess, if any, of the underlying stock value over the option exercise price (the intrinsic value). (Rouse and Barton, p. 68).
This way of recognizing compensation expense left open a large loophole for businesses to get around recording the expense. If firms simply put the exercise price equal to or more than the market price no expense will ever be recorded. In addition to this drawback, another is that when employee stock options are performance-based, the likely hood of recording compensation expense is higher which Opinion No. 25 discouraged (Ciccotello and Grant, p. 73). .
Even though businesses could get away with out recording a compensation expense, this was the standard for many years. Later in the early 1980s, officials of the accounting standard industry clearly saw that an expense should be recognized for employee stock options. In 1984, the FASB also noted concern for recognizing an expense so they the issued an Invitation to Comment. Then, three years later the FASB stated in a preliminary conclusion, that employee stock options should be accounted for at a "minimum Value". With this method, the exercise price is discounted, and then subtracted from the market price of the stock at the date of grant (Mozes, p.