Question

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 team paper response of 550 to 700 words in which you address the following requirements: Describe how Client X should account for its employee stock option plan under existing GAAP. Write a summary of your argument, citing concepts and definitions to buttress your case, assuming: You are siding with John.

* You are siding with Marcy.* This is the part I need help with.

Answer 1

Per the request, I'm just siding with Marcy.

The employee stock options are granted to the employees of the company where right is given to the employees to buy certain shares over a period of time(which is specifically known as vesting period) at a predetermined price.

The employee stock options dilute the value of current stockholders' as the number of outstanding shares increases, then the net income for the period gets divided by total outstanding shares and hence the earning per share of each stockholder decreases. So Marcy has a valid point.