Stock Option Plans Give Employees the Option to Purchase (A)

question 112

Essay

Stock option plans give employees the option to purchase (a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time. One of the most heated controversies in standard-setting history has been the debate over the amount of compensation to be recognized as expense for stock options. At issue is how the value of stock options is measured, which for most options determines whether any expense at all is recognized. The opposition included corporate executives, auditors, members of Congress, and the SEC.
Required:
Describe the primary objections of critics of the FASB's eventually successful attempt to require expensing of the fair value of the options.

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Definitions:

Subchapter S

A designation for corporations that meet specific Internal Revenue Code requirements, allowing them to pass income directly to shareholders and avoid double taxation.

Model Business Corporation Act

A model set of laws prepared by the Committee on Corporate Laws of the American Bar Association to standardize and provide a guideline for corporation law.

Small Corporations

Businesses incorporated under the laws of a state that have a limited number of shareholders and meet certain other criteria.

Benefit Corporation

A type of for-profit corporate entity that includes positive impact on society, workers, the community, and the environment in addition to profit as its legally defined goals.