Executive Stock Option Accounting Issues

As a long-term incentive system to manager, executive stock option (ESO) invented in America in 1970's was introduced into China several years ago, and many listed companies have showed great interest in the system. At present, some listed companies have been making some experiments on implementing ESO in mainland of china. Being lack of regulation to comply with, the operation of the system is not normative. So, Chinese Security Regulation Committee is drawing up the supervision regulation of ESO, and the Administration of Accounting Affairs of the Ministry of Finance is drawing up the standard of accounting for SEO.The objective of this dissertation is to salve China's practical problems based on China's specific circumstance and the lessons drawn from the studies on accounting and information disclosure for ESO.This dissertation consists of six chapters.Chapter I , Introduction. In this chapter, the author puts forward the main issues of this dissertation and discusses the methodology and the main contents of the paper.Chapter II, The recognition of ESO. In this chapter, the researcher dissertates the recognition of ESO. The researcher finds out that ESO isn't liability, nor equity according to the current accounting theory. It has the characteristics of both liability and equity. It's very difficult or impossible to solve the problem if we still depend on the current accounting theory. The researcher addresses two tentative plans to reform the current accounting theory: (1) not changing the fundamental structure of accounting elements, making the equity more independence; or (2) changing the fundamental?structure of accounting elements, adding another "capital" element or eliminating the difference between liability and equity. According to the current accounting theory, however, we should treat ESO as a special kind of equity.Although the issue of ESO is a kind of capital transaction, it doesn't cause liability, neither reduces equity. But the researcher believes that compensation cost of ESO should be recognized. The reasons are: (1) ESO has value; (2) ESO has some incentive to the manager and it can compensate the manager; (3) the recognition of ESO has some economic consequences.Chapter HI, the measurement of ESO. In this chapter, the researcher demonstrates the attribute of measurement at first, then narrates the measurement of stock option as a derivative instrument, at last explores the measurement of ESO. The conclusion is that ESO should be measured by fair value. To be specific, ESO should be measured by stock option pricing model. At the same time, we should do some modification on the stock option pricing model according to the nature of ESO. As to the choice of measurement date, the researcher's conclusion is that ESO and compensation cost should be measured at the grant date.Chapter IV, the disclosure of ESO. In this chapter, the researcher limits the research range of the disclosure of ESO in the annual report of listed companies which use ESO to inspire the manager. Disclosure includes the recognition of ESO in financial statements which consist of balance sheet, income statement and the statement of cash flow and disclosure note. Since the issue of ESO dilutes earnings per share (EPS), the researcher explains the calculation of EPS.Chapter V, the present status and feasibility of ESO in China. In this chapter, the research summarizes the present status and feasibility of ESO in China, dissertates the necessity and feasibility of ESO in China from theoretical and practical points of view, addresses some suggestions of ESO from themacro-policy perspective. The suggestions include: (1) making experiments on ESO in some listed high-tech companies; (2)further consummating corporate governance; (3) improving laws, rules and regulations which include company law, tax law and accounting regulation for ESO.Chapter VI, the present status of accounting for ESO and its information disclosure in China, and some suggestions. In this chapter, the researcher anal...