Journal of International Accounting, Auditing & Taxation 13 (2004) 21–37 Stock option compensation: impact of expense recognition on performance indicators of non-domestic companies listed in the U.S. Donna L. Street a,∗ , Sandra Cereola b a Department of Accounting, School of Business Administration, University of Dayton, Miriam Hall RM409, 300 College Park, Dayton, OH 45469-2242, USA b James Madison University, USA Abstract The IFRS 2, Share-based Payment, requires that companies recognize the fair value of employee stock options as an expense. To ascertain the impact recognition will have on companies domiciled in countries subject to accounting standards issued by the IASB’s liaison standard setting partners, this research examines the pro forma stock option disclosures provided in Form 20-F by Australian, British, Canadian, French, German, Japanese, and Irish companies. The findings indicate the average impact of expense recognition on diluted EPS will be approxi- mately 40% and will be material at a 5% level for the majority of the companies. The impact varies significantly by country. On average the annual expense recognized will be approximately 15% of beginning stockholders equity. For the majority of the companies, the charge will represent less than 1% of beginning equity. Again the impact varies significantly by country. The findings indicate that absent requirements that stock compensation expense be recognized, a material upward bias will be reflected in performance indicators of many non-U.S. companies and cross-border comparability will be impaired. Since our analysis is based solely on data for the year 2000 for companies domiciled in seven countries, future research will be needed to as- certain the impact of expense recognition on a broader range of companies reporting under IFRS 2. © 2004 Elsevier Inc. All rights reserved. Keywords: Share-based payment; Exposure Draft 2; Expense recognition; IASB ∗ Corresponding author. Tel.: +1-937-229-2461. E-mail address: donna.street@notes.udayton.edu (D.L. Street). 1061-9518/$ – see front matter © 2004 Elsevier Inc. All rights reserved. doi:10.1016/j.intaccaudtax.2004.02.004