Accounting for compensation involved in stock option and stock purchase plans;

              Accounting Research BULLETINS
January, 1953
No. 37
(Revised)
issued by the Committee on Accounting Procedure, American Institute of Accountants, 270 Madison Avenue. New York 16, N. Y.
Copyright 1953 by American Institute of Accountants
Accounting for Compensation Involved in Stock Option and Stock Purchase Plans
This bulletin supersedes Accounting Research Bulletin No. 37, "Accounting for Compensa-tion in the Form of Stock Options," issued in November, 1948.
INTRODUCTION
1. The practice of granting to officers and other employees options to purchase or rights to subscribe for shares of a corporation's capital stock has been followed by a considerable number of corporations over a period of many years. To the extent that such options and rights involve a measurable amount of compensation, this cost of services received should be accounted for as such. The amount of compensation involved may be substantial and omission of such costs from the corporation's accounting may result in overstatement of net income to a significant degree. Accordingly, consideration is given in this bulletin to the accounting treatment of compensation represented by stock options or purchase rights granted to officers and other employees.1
2. For convenience, this bulletin will discuss primarily the prob-lems of compensation raised by stock option plans. However, the com-
1 Bulletin 37, "Accounting for Compensation in the Form of Stock Options," was issued in November, 1948. Issuance of the present bulletin and its expansion to include stock purchase plans was prompted by the very considerable increase in the use of certain types of option and purchase plans following the enactment in 1950 of Section 130A of the Internal Revenue Code. This section granted specialized tax treatment to employee stock options if certain requirements were met as to the terms of the option, as to the circumstances under which the option was granted and could be exercised and as to the holding and disposal of the stock acquired thereunder. In general, the effect of Section 130A is to eliminate or minimize the amount of income taxable to the employee as compensation and to deny to the issuing corporation any tax deduction in respect of such restricted options. In 1951, the Federal Salary Stabilization Board issued rules and regulations relating to stock options and purchase rights granted to employees whereby options generally comparable in nature to the restricted stock options specified in Section 130A might be considered for its purposes not to involve compensation, or to involve compensation only in limited amounts.
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