Employers grant stock options as part of a compensation package to employees. Although the practice originated in the executive ranks, some companies, including many start-up firms, now make stock options a part of every employee's compensation. The option grants must be recorded on the company's financial statements, and if an employee leaves the company, the financial statements need to reflect the decrease in compensation expense since the employee forfeited his options.
Verify that the employee terminated employment before completing the vesting period for his stock options. Stock option awards usually vest based on meeting certain performance or service conditions. Vesting means the employee can now exercise his options and convert them to company stock.
Confirm vesting conditions for the stock options. If the option vesting period was contingent upon a certain market condition, and the market condition does not occur before the employee terminates, the stock option expense is not reversed on the financial statements.
Make a journal entry to reverse the expense related to the forfeited stock options out of the compensation expense account.
Verify the reduced compensation expense on the company's income statement.
Cynthia Gaffney has spent over 20 years in finance with experience in valuation, corporate financial planning, mergers & acquisitions consulting and small business ownership. She has worked as a financial writer for online finance publications since 2011, including eHow Money, The Motley Fool, and Sapling.com. She has also edited for several online finance publications, including The Balance, Opposing Views:Money, Synonym:Money, and Zacks.com. A Southern California native, Cynthia received her Bachelor of Science degree in finance and business economics from USC.