Current GAAP Recommends That the Fair Value Method Be Used

question 5

Essay

Current GAAP recommends that the fair value method be used to account for compensatory stock option plans.From a conceptual point of view, this method is an improvement over the intrinsic value method.
Required:
Explain how the fair value method is an improvement over the intrinsic value method.

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Definitions:

Account Balance

The total amount of money present in an account at a given point in time, considering all credits and debits.

Funds

Capital set aside for specific purposes or investments.

Present Value

Present value is a financial concept that represents the current value of a future amount of money or stream of cash flows, discounted at a specified rate of return.

Discount Rate

The interest rate used to discount future cash flows to their present value, often used in the valuation of investments.