Accounting's Phoenix: The stock options controversy just won't die. (Special Section: Stock Options).

LIKE THE MYTHICAL PHOENIX, which rises from the ashes, so, too, does the issue of how to account for stock options issued to employees and certain others. On the surface this doesn't appear to be a difficult task, considering the talent and expertise of those who have attempted to resolve this matter, but the accounting profession seems destined to wrestle with the issue again and again.

After the battles of the 1990s on this subject and the issuance in 1995 of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," many thought the matter had been settled. Then along came Enron and its aftermath, and Congress began to make noises again. The new International Accounting Standards Board (IASB) also decided this was an urgent subject for its agenda, although many of its constituent countries don't even know what stock options are. What is happening? I'd like to offer one perspective on this issue and suggest a possible solution.

HOW DID IT START?

A little background and history will be helpful. The earliest pronouncements on stock options were contained in Chapter 13B of Accounting Research Bulletin No. 43, "Compensation Involved in Stock Option and Stock Purchase Plans," issued in 1953. This was a revision of Bulletin No. 37, which had been issued in 1948. The first substantial accounting standard dealing with stock options (which incorporated Chapter 13B of ARB No. 43) was APB Opinion No. 25, "Accounting for Stock Issued to Employees," issued in 1972, just before the Accounting Principles Board ceased to exist. APB No. 25 accounting was relatively straightforward and simple. When stock options were issued, compensation expense was recorded for any difference between the price at which the employee could buy the stock and the price on the "measurement date." (Measurement date was the first date on which both the price and the number of options issued were known.) In the great majority of issuances, the measurement date was the date the options were i ssued, and they were issued at the market price on that date. Therefore the …