Compensation expense related to stock options is reported at fair value. The fair value has to be estimated using an appropriate valuation model.
The fair value of stock options is sensitive to inputs and assumptions of the valuation model:
In accounting for stock options, there are several important dates, including the grant date, the vesting date, the exercise date, and the expiration date.
The compensation expense is allocated over the service period.
Example:
A company awards 1,000,000 stock options to its executives on 1 July 2015. The estimated cost of each option is $0.50. The options require a service period of 4 years after the grant date before vesting. What is the stock option expense for 2015?
Solution:
Total expense = 1,000,000 x 0.5 = $500,000
Expense per year = 500,000 / 4 = $125,000
Expense for 2015, from 1 July 2015 to 31 Dec 2015 i.e half a year = 125,000 / 2 = $62,500
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