A company has a share-based compensation plan that it uses to reward executives. in that plan, executives are granted options with an exercise price equal to market value at the date of grant and they are nonqualified options for tax reasons. Those options are reported at fair value and accounted for as equity. This company prefers to have all share-based compensation plans reported as equity. The compensation committee notices that the executives typically exercise the options and then sell part or all of the shares for cash. This either indicates that 1, the executives prefer cash over these shares to 2, the executives believe that having to pay cash at exercise is not what they want.

Alternative 1: The company would make arrangements for a cashless exercise for the executives. The company would obtain the services of a broker, who would sell enough of the exercised shares to cover the exercise price and the income tax withholding for the executive. The executive would retain ownership of the remaining shares. More information about accounting for this transaction can be found on the next page.

Alternative 2: At exercise, the executive could choose between the conventional exercise of options (paying cash and receiving shares) and receiving in cash the difference between the exercise price and the market price on the exercise date. Question: Explain the reasons for any differences in accounting treatment among these 3 forms of the share-based compensation plan.