Infosys Technologies: Expensing Stock Options

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Case Details:

Case Code : BSTA027
Case Length : 17 Pages
Period : 1974 - 2004
Organization : Infosys
Pub Date : 2004
Teaching Note :Not Available
Countries : Global
Industry : Information Technology

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Corporate Background

After receiving a master's degree in electrical engineering from one of India's highly regarded Institutes of Technology (IIT - Kanpur) in the 1960s, Narayana Murthy (Murthy) left for France to develop software for the air traffic control system at Paris' Charles de Gaulle airport. During college, Murthy had believed that communism was the answer to his country's problems of poverty and corruption...

The Stock Options Phenomenon

Corporate compensation policies had evolved over time as companies looked for innovative ways of motivating employees. Employees were compensated in various ways such as cash wages, bonuses, perquisites and stock options...

The Expensing Debate

The plethora of accounting scandals that broke out after the Enron debacle had drawn attention to expensing stock options. Some experts believed the widespread overstatement of earnings due to the non-recognition of option expense was misleading investors about the true earnings capacity of their companies...

Accounting for Stock Options: The U.S. Scenario

American accounting rules distinguished between two types of options plans: compensatory and noncompensatory. Noncompensatory plans typically took the form of employee stock purchase plans. Compensatory plans were those that did not qualify as noncompensatory plans.

Noncompensatory plans were less prevalent compared to compensatory plans. They were less controversial. Compensatory plans were subjected to two accounting rules, intrinsic value method and fair value method...

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