Explain the accounting for employee stock options

EMPLOYEE STOCK OPTIONS

Firms compute a fair-value-based measure of employee stock options on the date of the
grant using an option-pricing model that incorporates information about the current market
price, the exercise price, the expected time between grant and exercise, the expected volatility
of the stock, the expected dividends, and the risk-free interest rate. Total compensation cost
is the number of options the firm expects to vest times the value per option. Firms amortize
this total cost over the requisite service period, which is the expected period of benefit. This
period is usually the period between the grant date and the vesting date. Firms do not typically
remeasure most types of stock options after the initial grant date.