The recognition of employee stock compensation (SBC) as an expense is an interesting aspect in the accounting and finance. Historically, employee stock comepensation are not expensed at the granting time under APB 25. FASB issued Statement 123R (Share‑Based Payment) in 2004 to replace APB 25 and requires all US public companies began expensing SBC starting in fiscal year 2006. In 2009, the standard was reorganized into the Accounting Standards Codification (ASC) 718, which continues to govern stock‑based compensation accounting today. This shock is used by Lian and Ma (2021) to examine how the cash flow shock impact firm’s debt issuance activity. The reason for recognising it as an expense is that it is considered a substitute for the wage expense, which is the cost of obtaining employee labor, and we record it at the option granting date.
The direct impact of including the SBC expense is a reduction in the profit. However, it has no impact on the operating cash flow and is added back as** a non-cash item** when calculating operating cash flow. Thus, under earnings pressure, firms may reduce SBC grants as an additional mechanism for influencing reported profits, complementing strategies such as share repurchases.
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[\^1] Meta cuts staff stock awards for a second straight year