The Accounting Rules Accounting regulators have struggled determining the best way to account for options. On the one hand, they obviously have some value to the employee. On the other hand, companies don't expend cash when they grant options. If an employee exercises an option, the company just issues a new share of stock. The company is basically using its ability to issue shares as a way to print shares and sell them at below-market prices.
Intrinsic value is the extent to which an options exercise price is below the current market price.
Since most companies issue options at or above market prices, they do not record compensation expenses for these grants. The fair value of an option can be calculated by using various pricing techniques developed on Wall Street to value traded options. While numerous assumptions must go into these calculations, they provide a rough approximation for what companies would expend to issue options. Bowing to outside pressure, particularly from upstarts that rely heavily on options as a compensation tool, accounting regulators put a loophole into the 1995 pronouncement. Impact Going back to our example with Sally, the differing compensation structures would have differing effects on the income statements of the companies involved.