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Accounting for Option–based Compensation: The Economic Cost Approach

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  • Charles I. Harter
  • T. Harikumar

Abstract

The intrinsic value approach amortizes over the life of the option, the difference between the stock price on the date of the grant and the exercise price of the option. The fair market value approach amortizes over the life of the option, the market value of stock options on the date of the grant. These approaches do not reflect the changes in the option–based compensation cost after the grant date. This paper proposes an economic cost approach that not only adjusts for the changes in the value of the options during its life but also records the issuance of the stock at fair market value on the exercise date.

Suggested Citation

  • Charles I. Harter & T. Harikumar, 2002. "Accounting for Option–based Compensation: The Economic Cost Approach," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 29(7‐8), pages 1007-1022.
    • Handle: RePEc:bla:jbfnac:v:29:y:2002:i:7-8:p:1007-1022
    DOI: 10.1111/1468-5957.00459
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    Cited by:

    1. Eugene Kang & Brian R. Tan, 2008. "Accounting Choices and Director Interlocks: A Social Network Approach to the Voluntary Expensing of Stock Option Grants," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9‐10), pages 1079-1102, November.

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