Stock Option Expense
AdvancedStock option expense is the cost a company records in its income statement for granting stock options to employees, based on the fair value of the options when they were granted and spread over the period in which they are earned.
Stock options give employees the right to buy shares at a set price in future. Even though no cash is paid, accounting standards treat options as part of employees' pay, so their value must be expensed.
The fair value of each option is estimated at the grant date, usually with an option pricing model, and the total is recognised over the vesting period. For example, if a company grants 100,000 options with a fair value of 6 each, vesting over four years, it records about 150,000 of expense each year.
Under IFRS and US GAAP, the expense is based on the grant-date value and is not updated for later changes in the share price. It is a non-cash expense, so it is added back in the cash flow statement.
Stock option expense is part of share-based compensation. Many companies, especially in technology, highlight adjusted profits that exclude it. Critics argue this overstates profitability, because issuing shares or options to staff has a real cost to existing shareholders through dilution.
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