Accounting for Employee Stock Options

Discuss with your team the following case study:

Client X offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that employee stock options, like all obligations to issue the corporation's own stock, are equity. The new staff accountant, Marcy Means, disagrees. Marcy argues that when a company issues stock for less than current value, the value of preexisting stockholders' shares is diluted.

Pretend you are hired to debate the issue of the proper treatment of options written on a company's own stock.

Write a response of 175 words in which you address the following requirement:

• Describe how Client X should account for its employee stock option plan under existing GAAP.