Accounting for Investments and Accounting for Employee Stock Options

Review the following case study:

FASB ASC 320 requires companies to assign their portfolio of investment securities into:

• Trading securities.
• Securities available for sale.
• Held-to-maturity securities.

Write a response of no more than 1,500 words in which you answer the following:

• Define each of these categories of securities and discuss the accounting treatment for each category.
• Discuss how companies are required to assign each category of securities into its current and noncurrent portions.
• Discuss the arguments for each position. Some individuals maintain that the only proper accounting treatment for all marketable securities is current value. Others maintain that this treatment might allow companies to “manage earnings”.

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Client X offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that employee stock options, like all obligations to issue the corporation’s own stock, are equity. The new staff accountant, Marcy Means, disagrees. Marcy argues that when a company issues stock for less than current value, the value of preexisting stockholders’ shares is diluted.

Pretend you are hired to debate the issue of the proper treatment of options written on a company’s own stock.

Write a team paper response of 550 to 700 words in which you address the following requirements:

1. Describe how Client X should account for its employee stock option plan under existing GAAP.
2. Write a summary of your argument, citing concepts and definitions to buttress your case, assuming:
   1. You are siding with John.
   2. You are siding with Marcy.