Accounting for employee share options : a critical analysis

Abstract

The main goal of this dissertation was to obtain an understanding as to the true economic nature of employee share options and the problems surrounding the accounting thereof.

The main conclusion of this study is that employee share options should be expensed in the income statement as and when the employee's services are performed. The reason is that employee share options are valuable financial instruments which the employer has used to compensate the employee for his services. It was also concluded that exercise date accounting and classification of outstanding employee share options as liabilities on the balance sheet is the most appropriate accounting treatment. Such accounting treatment trues up the accounting of employee share options with that of cash-settled share appreciation rights, which are economically equivalent transactions.

The measurement of employee share options should be based on their fair value using an option-pricing model adapted for the specific features of employee share options.