The Stock Plans Essay Example | Topics and Well Written Essays - 1500 words

The Stock Plans - Essay Example The major difference between the two accounting methods is that the intrinsic value based method overstates the income of the company. This method does not reveal the fair value of the stock, whereas the fair value based method, which is also recommended by FASB is based upon the estimated fair value of the company’s stock. Amount Of Compensation Under a stock options plan, 100 shares were offered to each employee that was purchased or exercised at $45 per share i.e., the grant price. The stock options would cost them $4500 ($45x100). However, the current market price of the stock is $60, which makes $6000 ($60x100) if sold in the market. The shares would obviously be sold on the current market value and hence each employee would get the difference ($6000-$4500) between the grant price and the current market value. The total amount of compensation that each employee would get is $1500 making the total compensation of $3000 paid by the company to two employees. Recording Of Sto ck Options In XYZ’s books The US GAAP requires the companies to expense out the employee stock options on the fair or intrinsic value, as well as disclose it in the company’s financial statements, which is supposed to decrease the company’s earnings significantly. Therefore, an expense will be recorded in the books of XYZ Corporation against the amount of employee stock options as per the accounting practice of FASB and the corresponding expense will be disclosed in the company’s financial statements.