The Development of a Verified Fair Value Approach to Accounting for Employee Stock Options

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					12     International Journal of Management             Vol. 27 No. 1          April 2010


The Development of a Verified Fair Value Approach to
Accounting for Employee Stock Options
Harry Howe
State University of New York Geneseo
Jeffrey Lippitt
Ithaca College

We consider problematic features of SFAS 123 (R) and then present a new approach to
the accounting for Employee Stock Options (ESO) that addresses prominent criticisms of
both grant date acc
				
DOCUMENT INFO
Description: We consider problematic features of SFAS 123 (R) and then present a new approach to the accounting for Employee Stock Options (ESO) that addresses prominent criticisms of both grant date accounting (inaccurate estimates) and exercise date accounting (delayed recognition). The accounting for our Verified Fair Value (VFV) approach begins with a model-derived recognition of an ESO obligation, which is presumed to be the best available estimate of the present value of the Realized Intrinsic Value (RIV). Distinctive features of the VFV approach include disaggregation of the ESO expense into accruals and fair-value changes and a truing-up mechanism which could provide useful feedback about the accuracy of ESO model valuations. The recognition of subsequent changes in the intrinsic and time values of the option converge on a value that is exactly equal to the issuer's cash cost for the option. Information provided under the VFV approach would align with the requirements to reconcile comprehensive income and cash flows presently contemplated by the IASB and FASB in their Discussion Paper for the Financial Statement Presentation Project. Verified Fair Value is accurate and reliable, transparent, readily verified, easily auditable, practical and promotes consistency and transparency. [PUBLICATION ABSTRACT]
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