ACTG 4P11 Chapter Notes - Chapter 8: Net Income, Management, Cash Flow
Document Summary
Especially to managers, even if there is no cash flow effect. Per accounting principle board (apb) expense does not need to be recorded if intrinsic value is zero: deemed to be inadequate because failure to record an expense understates the firm"s compensation cost and overstates its net income. Solution to this was the black/scholes option pricing formula but several aspects of. Esos were not captured by the formula: assumes options held to expiry date. But esos can be exercised early, between vesting and expiry dates: ended up overstating eso expense, accountant"s answer to this was to use expected exercise date. Difficult to estimate eso expense so fasb backed down on the idea and gave the option to report eso expense as supplementary information. Diluted eps is always lower than basic eps as it considers if all convertible securities were exercised (worst-case scenario) Overdosed on eso compensation since there is no effect on net income.
