Prior to 2005, firms did not have to recognize an expense for all employee stock options, but rather could disclose the effect of the options in the footnotes. The concept of recognition versus disclosure in the context of employee stock options is discussed in the basis for conclusions in Statement of Financial Accounting Standards No. 123(R) (paragraphs B22 through B26).
a. What is the standard setters’ view on the ability of disclosure to substitute for recognition in the financial statements?
b. What reasons do they give for holding this view?
c. Do you agree or disagree? Why?