Accounting for Employee Stock Options

A company, XYZ Corp, recently issued stock options to its employees as part of their share-based compensation plan. Each stock option gives an employee the right to purchase one share of XYZ Corp's common stock at a fixed price over a specified period. If the market price of the stock rises above the exercise price, the employee can benefit by exercising the option.

As part of its financial reporting, XYZ Corp needs to determine how to account for these stock options on its financial statements. Share-based payment arrangements typically require companies to recognize the fair value of the equity instruments granted as an expense in the financial statements. It's important to know how and when this expense is recognized for accurate financial reporting.