Employee Stock Options: Alternative Valuation Models: Two Valuation Models Result in Lower Reported Expense on the Income Statement

The Financial Accounting Standards Board (FASB) is considering modification of the method of accounting for employee stock options. It has tentatively decided that goods and services received in exchange for all forms of stock-based compensation should be recognized as an expense and that this expense should be measured at fair value. A major issue to be considered during the deliberations by the FASB concerns the valuation models used to estimate the fair value of stock options and therefore the expense to be recognized. This article reviews the current status of the valuation of employee stock options and suggests two different valuation models that result in lower reported expense on the income statement.