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The purpose of this case study is to discuss the issues related to stock options and how they
should be accounted for.
Introduction
In the early 1990s, FASB proposed an accounting rule calling for corporations to recognize
compensation expense for certain stock options when they were granted to executives and
employees. This proposal was met with strong opposition from many different sources
including: Congress who passed a resolution by vote urging FASB to drop the proposed
standard, business executives who stood to lose the most, and even the accounting firms
who were accused of lobbying for their largest clients. New issues were raised over the
controversy. Among these issues was whether accounting firms undermined the integrity
and credibility of the independent audit function when they lobbied on behalf of
controversial positions supported by their audit clients and whether the authority for
issuing accounting rules should remain in the private sector or be assumed by a
governmental agency.
Stock Options as Compensation Expense
Stock options have become an important part of compensation for key executives and
employees. In 1978, Chrysler hired Lee Iacocca to turn around the company was having
financial troubles. Iacocca was given $1 annual salary and 400,000 stock options. He was
able to turn the company around and cashed in $40 million in profit with his stock options.
It was a gamble for Iacocca and would only pay off if he succeeded in turning the
company around. For newly emerging companies especially in the high-technology
industries, stock options are an important corporatestrategy. It allows these companies to
