How to Report Outstanding Stock Options to the Compensation Committee
A stock option is a contract that grants the holder the right to transact a company's stock at a predetermined price (strike price) within a specified duration (exercise period). Companies issue statutory stock options in the form of employee stock options or non-statutory stock options in the form of direct public issue. These stock options are classified either as qualified stock options that are held for at least one year and whose profits are subjected to lower capital gains taxation or as non-qualified stock options that are transferable and whose profits are subjected to ordinary income taxation. Outstanding stock options are the non-exercised or unexpired contracts. Compensation committee is the federal body that is charged with the responsibility of ensuring that businesses observe corporate governance regulations when awarding directors and employees through employee share ownership incentive plans.
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Instructions
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Add the total value of the total number of the qualified and non-qualified stock options that were issued to employees by the company during the period. Subtract the number of the employee stock options that were exercised and those that expired from the total value of the employee stock options. Note the difference as the total value of the outstanding statutory stock options issued by the company.
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Add the total value of the total number of stock options that the company issued to the general public. Subtract the total value of the stock options that were exercised by the public and those that expired from the value of the total number of stock options issued to the public. Note the difference as the total value of the outstanding non-statutory stock options issued by the company.
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Add the total value of outstanding statutory stock options to the total value of the outstanding non-statutory stock options, and the sum will be the total outstanding stock options issued by the company.
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Multiply the strike price by the total of number of all the statutory and non-statutory stock options that were exercised. Post the resulting figure as a debit entry in the outstanding stock options account and as credit entry in the owners' equity account.
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Tips & Warnings
Bear in mind that qualified stock options are incentives issued to the top management of the company and must be held for at least one year before they are exercised. Therefore, treat any qualified stock options that are exercised within less than a year of the date of their issue as unqualified stock options.
Each contract represents 100 shares of the underlying stock that are exercised by buying or swapping the underlying stock.
Do not leave out any expired stock option contracts from your calculations because such omissions will give you the wrong figures for outstanding stock options.
