Three places an award shows up after the expense, and the third is the one people miss.
How do exercises affect the share count and cash?
Start with dilution. The treasury-stock method treats an in-the-money option as exercised and the proceeds as used to buy shares back at the average market price. The proceeds aren't only the exercise price. Under both ASC 260 and IAS 33 they also include the compensation cost not yet recognised, because an employee who has not finished vesting still owes service the company has not yet paid for. Granite Peak's 2,000,000 options at a $40.00 strike, two years into a four-year vest with $14,600,000 unrecognised, carry assumed proceeds of $94,600,000 against $80,000,000 on the exercise price alone. At an $88.00 average price that buys back 1,075,000 shares and leaves 925,000 incremental shares, against 1,090,909 if the unrecognised cost were ignored. In practice, use the filed diluted count. Rebuild it once, though, so you know what the filed number contains.
Then cash. The expense is non-cash and gets added back. The exercise proceeds of $80,000,000 are a financing inflow. If the company buys back the 2,000,000 shares it just issued, at the $96.00 exercise-date price, that's $192,000,000 of financing outflow, so the net financing effect is $112,000,000. That figure equals the intrinsic value transferred to employees, and the identity holds generally. Neutralising the dilution from an exercise costs the company the intrinsic value, in cash, in the financing section, below every free-cash-flow line anyone quotes.
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Why does the tax line differ from the expense?
Then tax, where the two rulebooks disagree in a way that shows up in the effective rate.
The employer's tax deduction commonly turns on the intrinsic value at exercise and not on the grant-date fair value that drove the accounting, which is the fact pattern both frameworks are written around and the one the arithmetic below assumes. Where it works that way the deduction is unknown until exercise and moves with the share price, so book expense and tax deduction diverge, and the frameworks handle the divergence differently. The rule isn't universal. A US incentive stock option carries no employer deduction at all, and a restricted stock unit is deducted at its value on vesting. The Indian treatment of an option discount was settled through litigation instead of by statute. Verify the deduction rule for the instrument and the country before applying this arithmetic to a real filer; checked September 2026.
ASC 718 vs IFRS 2: where the excess tax benefit goes
ASC 718, since 2016, builds a deferred tax asset on the cumulative book expense and, on exercise, recognises the entire difference between the actual tax benefit and that asset in the income statement as a discrete item in the tax line, classified as an operating cash flow. Granite Peak recognised $29,200,000 of expense and built a $6,132,000 deferred tax asset at 21%. Its options were exercised at $96.00 against a $40.00 strike, an intrinsic value of $112,000,000 and a tax benefit of $23,520,000. The excess of $17,388,000 goes into the tax line at once. Pre-tax profit of $180,000,000 would have carried $37,800,000 of tax. Instead it carries $20,412,000, and the effective rate is 11.3400% instead of 21.00%.
IFRS 2 with IAS 12 measures the deferred tax asset on the estimated future deduction, which is the intrinsic value at each reporting date, and splits the result. The portion corresponding to the cumulative book expense goes to profit or loss. The excess goes directly to equity. On identical facts the international filer's tax line shows $6,132,000 of benefit spread over four years and its equity absorbs the $17,388,000 with no effective-rate effect at all.
So a rising share price cuts an American filer's effective tax rate and does nothing at all to an international filer's.
Granite Peak's windfall is 10.8956% of its reported net income and 9.6600% of its pre-tax profit. It's entirely a function of the share price, and it reverses into a shortfall the year the price falls below the strike. Normalise it before comparing the two companies, and before forecasting either.
What about shares withheld for tax?
One more item that looks like tax and is cash. Companies routinely withhold shares on vesting to fund the employee's statutory tax and remit cash to the authority. Provided the withholding stays within the maximum statutory rate, the award stays equity-classified, and the cash remitted is a financing outflow. For a large technology employer that line runs into billions of dollars a year and is invisible in operating cash flow.