For U. S. public corporations, SFAS 123R required expensing of ESOs. However, the exposure draft of this standard met considerable opposition, mostly from large technology companies. These companies formed an anti- expense lobby group, the International Employee Stock Options Coalition, to fight the proposal. As a result, several bills were introduced in the U. S. Congress to override or modify the FASB proposal. Suggested modifications included expensing only ESOs for the firm’s top five executives, and setting share price variability to zero in the Black-Scholes formula.
The FASB’s stand was strengthened, however, because numerous companies, including General Motors Corp., Microsoft Corp., and Exxon Mobil Crop., had already decided, voluntarily, to expense their ESOs. Also many firms reduced their ESO awards. For example, the Bank of Montreal reduced options issued as compensation by two – thirds, replacing them with increased cash bonuses and stock awards.
In October
004 The FASB announced it was delaying implementation of its proposal for six months, to June 15 2005 However, except for the implementation delay, it did not back down on this standard.

Required
a. Evaluate the relevance and reliability of Black- Scholes as a measure of the fair value of ESOs. Use the three components of representational faithfulness outlined in Section 3.7.1 in your answer.
b. Some critics of the proposed standard claim that the cost of ESOs is zero. Why? Explain to these critics why their claim is incorrect.
c. Why are managers of some firms strongly opposed to expensing ESOs?
d. Why would a firm voluntarily adopt expensing ESOs?