Valuation of Stock Option Contracts.

Abstract The author argues that the accounting profession should investigate further the possibilities of recording compensation expense at the date of grant differently than under present generally accepted accounting principles. The economics and finance literature provides evidence that option contracts can be valued, although an exact evaluation formula still is not devised. However, the literature is remarkably consistent with respect to the variables to consider and the range of values that are appropriate for a given set of conditions. Although an exact figure probably never can be known for any option, it is reasonable to assume that the value for an option can be approximated with a high degree of confidence. In the case of nonqualified stock options, it would seem that the models provide a good answer to our valuation problems. On the other hand, qualified stock option plans involve more variables, and it appears that additional research is needed to model their restrictive components.