Final answer:
When estimates of options forfeitures change, the cumulative effect on compensation is recognized in the financial statements of a company.
Step-by-step explanation:
When estimates of options forfeitures change, the cumulative effect on compensation is recognized in the financial statements of a company. This is because options forfeitures represent a cost to the company, as they result in the reduction of future compensation expenses.
For example, if a company initially estimates that 10% of the options granted to employees will be forfeited, but later revises the estimate to 5%, the change in estimate will result in a lower compensation expense in the financial statements.
It's important for companies to accurately estimate options forfeitures, as changes in these estimates can impact the financial performance and reporting of the business.