EconPapers    
Economics at your fingertips  
 

Settlement-date Accounting for Equity Share Options – Conceptual Validity and Numerical Effects

Peder Fredslund Møller (pfm@asb.dk)
Additional contact information
Peder Fredslund Møller: Department of Accounting, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://www.asb.dk/staff/bs/pfm.aspx?page=%7B803EFF10-69F7-4C0F-AEE3-F7F410E4B6F2%7D

No R-2006-01, Financial Reporting Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: This paper shows that settlement-date accounting for equity share options can be seen as an accounting method which implements a shareholder focused residually rewarded partners’ equity view. This equity view represents a simple, natural extension of the shareholder proprietary view. It implicates an equity and income sharing model for accounting which is characterized by specification of both shareholders’ and non-shareholders’ parts of total equity and income. When using this equity and income sharing model, the remeasurements of equity share option obligations made by settlement-date accounting are fully conceptually valid. They represent measurements of one partner group’s share of total equity with effect for another group’s share of total equity and income: the shareholders’ part. Partially, this equity and income sharing model is already the basis for existing accounting standards.

It is shown that an intriguing implication of the equity and income sharing model is the fact that treasury shares can hedge present shareholders’ share price risk from the obligation to holders of equity share options. A special hedge accounting construct is needed to account for this hedge effect, and the construct of this model is shown. Numerical simulations are used to illustrate the long run expense effects for shareholders from equity share options by settlement-date accounting both when the expense effects are unhedged and when they are hedged with treasury share holdings. The results demonstrate that the expenses resulting from settlement-date accounting for equity share option awards are significantly higher on average than the expenses resulting from grant-date accounting. And they show that the cost of equity, the share price volatility and the lifetime of the equity share options are important determinants for the size of the differences in total expenses, which in a long run perspective is to be expected from the use of these two alternative accounting models for equity share options. The simulation results demonstrate that hedging with treasury share holdings is very effective to stabilize expenses resulting from options granted to employees

Keywords: No keywords (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-06-01
New Economics Papers: this item is included in nep-cmp
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.hha.dk/afl/wp/rep/R_2006_01.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.hha.dk:80 (No such host is known. )

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhb:aarbfr:2006-001

Access Statistics for this paper

More papers in Financial Reporting Research Group Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Helle Vinbaek Stenholt (hes@asb.dk this e-mail address is bad, please contact repec@repec.org).

 
Page updated 2025-01-16
Handle: RePEc:hhb:aarbfr:2006-001