Executive Stock Option Accounting Issues

Because the future is uncertain, firms survive in the uncertainenvironment, and the firm's income is a random variable, so it isimpossible to make all members get the fixed remuneration in the firm,someone must be the person who asks for the residual part. In the modernenterprise shareholders have the ultimate ownership of assets and theresidual claim. Meanwhile, because people's ration is limited, theuncertainty of the environment is unable to be totally anticipated. So thecontract between shareholders and managers is incomplete. When theincident happens in the future, there must be someone to make policy,which is called the residual rights of control. Managers hold the rightactually. But economists think that the residual rights of control shouldmatch with the residual claim to maximize the efficiency. Namely lettingthe maker of the risk becomes the bearer of the risk, that is to say, weshould make everybody be responsible for his own behavior. But In themodern enterprise the residual rights of control and the residual claim areseparate, so shareholders have to bear the consequence for the behavior ofmanagers. Shareholders purse the maximization of their wealth, andexecutives pursue the maximization of their own benefit. But because ofthe limitation in knowledge and lack of time it is impossible forshareholders to know about the manager's behavior, and managers mightutilize the advantage of information to avoid shareholders' supervision.They may adopt action to maximize their own benefits, and may utilizethe power that shareholders endow to seek their own interests at the costof shareholders. Under the asymmetric information mentioned above andthe uncertain environment, if shareholders lack the effective supervisionand restriction to managers, they will be inclined to the decision whichbenefits themselves but unfavorable to the shareholder. For this reason,we need to design a kind of mechanism to make the managers try theirbest to be responsible for their own behavior, that is to say, make theshareholder's wealth be an important variable in the goal function ofmanagers. If we use the stock price to express the shareholder's wealth,the mechanism had better make the manager's income be the function ofstock price. The Executive stock option (ESO) means that the firm offers a kindof right to the managers of firms, allows them the right of within specificperiod, generally 3-5 years or longer, according to the price made inadvance to buy some common stocks of the firm. Executive Stock optionbrought up the brilliance of U.S.A. in the 1990s, but a lot of questionshappen now. However, firms in the American do not give up the systemof stock option completely. The existence of the system proves that theincome is greater than the cost of the system. The firms in our countryhave tried this system for a few years. When the system is facing thechallenge in its birthplace, what should our firms, which are carrying outthis system? Should they give up enforcing or go ahead boldly? We needthe answer to the question urgently. So the purpose of this text is to givethe answer of this question through the research on its basic theories. This thesis uses the knowledge of the information economics,enterprise's theory, accounting, etc. The full thesis is divided into threemajor parts altogether. The first part gives the brief introduction of thedefinition, incentive mechanism, characteristics and development courseof the Executive stock option and the reason why the Executive StockOption exists from the angle of evading taxation, encouragement andmanpower capital participating in the share of remainder in the firm. Thesecond part on the foundation of the first part has deep research on theproblem that is how to deal with the Executive Stock Option inaccounting, and draws the conclusion that the ESO is a special contingentitem of firms, and that ESO can't be measured objectively on the grantday, thus deriving the outcome that we needn't deal with ESO in theaccounting on grant day further. But this is not to say that the relevantinform...