All other stock option plans are assumed to be a form of compensation, which requires recognition of an expense under U.

The amount of the expense is the fair value of the options, but that value is not apparent from the exercise price and the market price alone. Option valuation is a finance concept, and it generally relies on the Black-Scholes method, which is beyond the scope of this article.

The expense is recorded equally throughout the entire vesting period , which is the time between the date the company grants the options and when the individual is allowed to exercise the option.

In other words, U. The entry credit is to a special additional paid-in capital account.

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Friends Company, a fictitious entity, grants its CEO 5, stock options on January 1, 20X4. Each year, the company will record the following compensation entry. If the options are exercised, the additional paid-in capital built up during the vesting period is reversed.

Stock option expensing - Wikipedia

If the options are not used before the expiration date, the balance in additional paid-in capital is shifted to a separate APIC account to differentiate it from stock options that are still outstanding.

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Basics of accounting for stock options. Compensatory stock option plans. Options not considered compensation 3.

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