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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs
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To: R2O who wrote (754)8/9/2005 9:57:38 AM
From: GVTuckerRead Replies (1) of 786
 
R2O, RE: Would you be kind enough to reference IRS document with permitted methods for calculating option expense (similar to methods used to calculate depreciation)?

I don't have the IRS link handy, but the method of calculation is the actual difference between the strike price of the option and the market price of the stock when the option is exercised.

If one can reduce present taxes based on the calculated option expenses, does one then need to record a (perhaps) gain when they are actualized (similar to depreciation and final disposal of depreciated property)? Would the IRS require one to escrow some amount against the possible future tax liability?

See the above. There is no contingent liability with the IRS' method of calculation.

I am wondering: if the IRS permits deductible option expense (which is an estimate of future value), why there would be any discussion about valuation methods as it would seem reasonable to use the very same methods permitted 'for many years' by the IRS?


Because while this method is easy to calculate, it doesn't make accounting sense. An accountant strives to record an expense when it is incurred; in this case, the expense should be recorded when the option is awarded to the employee, not when the option is exercised. If a company has relatively constant option award practices, those two numbers should balance out to be the same over time, though the timing would be drastically different.
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