For the Last Time: Stock Options Are an Expense

Stock options are not recorded as an expense on companies’ books. But the arguments for this special treatment don’t stand up. Let’s end the charade.

by

and

Robert C. Merton

by

and

Robert C. Merton

From the Magazine (March 2003)

The time has come to end the debate on accounting for stock options; the controversy has been going on far too long. In fact, the rule governing the reporting of executive stock options dates back to 1972, when the Accounting Principles Board, the predecessor to the Financial Accounting Standards Board (FASB), issued APB 25. The rule specified that the cost of options at the grant date should be measured by their intrinsic value—the difference between the current fair market value of the stock and the exercise price of the option. Under this method, no cost was assigned to options when their exercise price was set at the current market price.

A version of this article appeared in the March 2003 issue of Harvard Business Review.

ZB

Zvi Bodie is a professor of finance at Boston University’s School of Management.
Robert S. Kaplan is a senior fellow and the Marvin Bower Professor of Leadership Development emeritus at Harvard Business School. He coauthored the McKinsey Award–winning HBR article “Accounting for Climate Change” (November–December 2021).
RM

Robert C. Merton, a recipient of the 1997 Alfred Nobel Memorial Prize in Economic Sciences, is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management. He is also the resident scientist at Dimensional Fund Advisors, a Texas-based global asset management firm, and University Professor Emeritus at Harvard University.

For the Last Time: Stock Options Are an Expense

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