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The Coming Storm: Mandatory Expensing of Stock Options

Harvey L. Pitt | December 16, 2003

In 1995, FASB required corporations either to expense stock options at the time of grant, reflecting their estimated fair value directly in their income statements, or to disclose the pro forma impact of expensing options in a financial statement footnote.

Typical stock option plans that establish the number of shares and exercise price at the time of grant could be valued in a company's financial statements at their "intrinsic value" — the difference between the option exercise price and the stock price on the grant date.

Because these options typically were granted at a price equal to the stock price on the grant date, no compensation expense needed to be recognized in a company's income statement. Companies choosing footnote disclosure were mandated to use "...

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