An Inquiry Into American Debate On Expensing Employee Stock Options

Through a fairly thorough review of the pros and cons of expensing employee stock options in America and an inquiry into the cause, accounting handling and rationale of the evolution of the employee stock option system, this thesis is intended to grasp the true meaning of the term "expensing" in American context, in order to make clear the intellectual advance in accountancy and the progress in standards guiding accounting practice, both of which are embodied in the superseding by SFAS 123 of APB 25. We can thereby derive some revelations from our inquiry into American debate on this issue in terms of theory and practice. In this article we propose that in intellectual groundwork we should embrace the idea of expensing stock options advocated by SFAS 123, that is, recognizing them as costs and including them in the income statement after evaluating their fair value, and we also suggest that in accounting practice our application of the accounting standards for stock option expensing set by SFAS 123 should be postponed for the time being for the rapid growth enterprises in the high-tech and emerging industries so as to leave adequate time for these businesses to gradually adapt to them in their vigorous future development.As to whether employee stock options should be recognized as costs and whether they can be calculated accurately, this thesis has sorted out and summed up the cases of both the opponents(Issuing stock options costs the company no outflow of cash, and it is a transaction which, irrelevant to the income statement, merely affects the balance sheet.) and advocates. On this very basis, we have made it clearly that a grasp of the integral nature of cost recognition, evaluation by fair value approach and listing in the income statement as an inseparable whole is the key to gaining a true understanding of the expensing of employee stock option. And in the light of this very understanding, this thesis has made some discrimination between several views, which are alive at home, as to the nature and accountancy handling of employee stock options, with the emphasis on an analysis of the "profit-distributing view" advanced by Xie Deren and Liu Wen. We locates the root-cause of its fallacy as separating accounting recognition, value measurement and information disclosure from an integral whole and singling out accounting recognition as the sole aspect to be explored.The publishing of Black-Scholes option-pricing model provided a reliable method to accurately evaluate the fair value of the stock options and also laid a solid theoretical foundation for the recognition of stock option as something with a definite value. This thesis puts an emphasis on the enormous theoretical value of the B-S model and its decisive influence on the accounting practice involving employee stock options, explaining why the inadequate recognition of its theoretical significance on the part of some figures in the accounting circle at home is one of the reasons behind the confusion and errors caused by some domestic views as to employee stock options.This thesis has an inquiry about how the United States, when confronted with such an unprecedented form of innovation as employee stock option incentives, had completed the creation of new rules step by step through a tentative course of the game between various quarters of society in repeated practice and theoretical groping. A suggestion is put forward that we learn from their experience of formulating and perfecting accounting standards by pursuing a route of "case-induced institutional change" and consciously imitate them to reach generally accepted accounting principles through "multiple game".