When the figures are compared between the two methods, the figure that denotes eBay’s unprofitable operations can be turned to a profitable one with the choice of the accounting method. Thus, ethical considerations which should be based on accurate reporting of its performance to its investors, are of little importance to eBay in choosing the method for reporting its options.
Certain financial considerations seem to play part in the choice of eBay’s financial reporting for stock options. As the choice will impact a handful of items in the financial statements of the company, financial considerations seem to be very relevant as for eBay’s choice of intrinsic value over fair market value (Bradshaw 2004, 3).
According to an article from Darden Business Publishing, University of Virginia, the main advantage of choosing intrinsic value over fair market value is that firms will not record compensation expense when the market price is equal to the exercise price (2004, 12). This gives a firm a significant financial advantage as it reduces the effect of compensation expenses to the company’s operating expenses, which then affects the company’s net income.
When a company like eBay can choose to report its stock options based on the intrinsic value method, it is required to put footnotes in order to show the figures if fair market value method is used for financial reporting. However, because this is just a footnote and does not require recognition in the financial statements of the company, the choice has some strong relevance to the financial considerations that are associated with it.
According to the article from the University of Virginia, the shift from intrinsic value to fair market value method of reporting stock options will impact eBay’s financial statements by recognizing a deferred tax asset for the estimated future benefit,