- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 15. Integration of Financial Statement Analysis Techniques
- Subject 2. Long-Term Equity Investment
CFA Practice Question
Which of the following statements relating to stock option costs is false?
B. Companies have the choice of recording employee stock option expense in current period income or footnoting their proforma effects.
C. Use of the fair value method results in recognition of stock option expense in current income.
D. Under current accounting standards, companies are required to disclose information about the number of outstanding stock options and the assumptions used to compute their value in the computation of proforma income.
A. Under the intrinsic value method, compensation expense is the amortized portion of the value of the options granted and is reported as a current period expense.
B. Companies have the choice of recording employee stock option expense in current period income or footnoting their proforma effects.
C. Use of the fair value method results in recognition of stock option expense in current income.
D. Under current accounting standards, companies are required to disclose information about the number of outstanding stock options and the assumptions used to compute their value in the computation of proforma income.
Correct Answer: A
The intrinsic value method does not result in compensation expense if the option strike (exercise) price is set equal to the market price of the stock on the date of grant. If companies use the intrinsic value method, they must disclose in the footnotes the proforma net income had the fair value method been used.
User Contributed Comments 1
| User | Comment |
|---|---|
| quanttrader | via intrinsic value method, if option is granted at current mkt price (iv = 0), then it will not be exercised and therefore should not be reported as compensation expense; rather it should be disclosed in the footnote the expense that would occur had the fair valuation method been used instead |