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This paper has the objective to show how stock option prices differ when different methodologies and different inputs are used to calculate them. In this paper we will concentrate on American options that are granted by companies to their employees as a benefit. These types of American options are usually issued for a long-term period of time (ex. ... Since these options can not be sold in the market, is not rational to assume that they will be held to maturity and they have to be exercised if the owner wants to receive any immediate proceed.
In this paper we will be concerned about the accounting implications of using different methodologies to calculate the price of these employee options. Accounting Principles Board (APB) Option No. 25 issued in 1972 prescribed an intrinsic-value method for determining employee stock option value. In October 1995 Financial Accounting Standards Board (FASB) updates the APB’s statement into a new standard (SFAS No. 123) that encourages using a method of the accounting, based on the fair value for all employee stock option plans.
Paragraph 19 of the new standard states that, the fair value of a stock option granted by a public entity shall be estimated using an option pricing model that takes into account as of the grant date the exercise price and expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock, and the risk free interest rate for the expected term of the option.
Approximate Word count = 1091
Approximate Pages = 4.4
(250 words per page double spaced)
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