Which of the following describes the correct treatment of the exercise of nonqualified stock options (NQOs)that were granted when ASC 718 applies?
A) Financial-no expense; tax-no deduction.
B) Financial-no expense; tax-deduct bargain element at exercise.
C) Financial-expense value over vesting period; tax-no deduction.
D) Financial-expense value over vesting period; tax-deduct bargain element at exercise.

Question

Quizplus · Accepted Answer

When ASC 718 (Accounting Standards Codification Topic 718) applies, the correct treatment of the exercise of nonqualified stock options (NQOs) is to recognize an expense over the vesting period, equivalent to the fair value of the options granted. This expense is recognized in the financial statements. For tax purposes, the difference between the fair market value of the shares and the exercise price (known as the "bargain element") is taxable as ordinary income to the employee at the time of exercise, and the company is allowed a tax deduction for the same amount. Therefore, the correct treatment is financial-expense value over the vesting period; tax-deduct bargain element at exercise (option D).

Which of the Following Describes the Correct Treatment of the Exercise