Should Companies Expense Stock Options? 418
A reader writes : "The New York Times is running a story about proposed accounting changes to force companies to expense stock options. Is this a necessary and proper oversight measure to enforce financial discipline on companies that might otherwise have none? Or would this measure basically stop companies from offering fiduciary responsibility incentives to their employees? What do you think about this? What should the final decision be? And what measures should be taken to influence the decision-making process?"
Fiduciary responsibility incentives? (Score:5, Interesting)
Perhaps this was a typo for "fiduciary irresponsibility incentives"?
Re:Fiduciary responsibility incentives? (Score:5, Insightful)
I've had long discussions about options with my friends. I finally realized the only sensible objection to stock options. And that is they have no impact on the cash position of the company. When a company is small or newly founded, it doesn't really make sense to value options, as at that point the cash poisition of the company is the overriding concern; this allows start-ups to offer compensation that, while not equal to that of larger companies, offers a tremendous possible upside to employes. Once cash flow is no longer really concern, it's convenient to continue to give options, as it doesn't count against the income statement. At this point, Warren Buffet's words quoted elsehwere (if options aren't compensation, what are they; don't we expense compensation?).
In short, options for start-ups make sense, and no one really cares what the GAAP earnings are-- cash flow is much more important. For established companies, cash flow is often difficult to relate to the success of a company, so using GAAP earnings makes sense, and options should be expensed. And I have no idea what "fiduciary responsibility incentives" are, and the submitter doesn't either.
Re:Fiduciary responsibility incentives? (Score:3, Interesting)
In privately held companies, stock is issued depending on the perceived value of the company and what monies investors have put up. While there is no true value, this stock is an indication of what percentage an investor 'owns' in a company. If the company is sold, the proceeds are split up depending on the stock ownership. It is not uncommon in those instances too for all options to become immediatly vested, the same is
Re:Fiduciary responsibility incentives? (Score:3, Informative)
A great read on the subject is Warren Buffet's 1992 letter to shareholders [berkshirehathaway.com]. It's a ways down - the section is called "Two New Accounting Rules and a Plea for One More" and it's in the second part of that section. Anyway, to answer your question:
1) Options have value, otherwise they wouldn't be given as compensation.
2) Value which is given for a service should be expensed.
Now, the trouble comes wit
Re:Fiduciary responsibility incentives? (Score:3, Insightful)
Then I hope you never have to manage a company. Managing a company is all about managing non-cash assets and expenses, because they wi
Re:Fiduciary responsibility incentives? (Score:3, Informative)
Ah, but they do.
Employees will take stock options in lieu of cash to some degree, so issuing stock options lowers the cost of paying employees wages here and now in this fiscal year.
Then, in later years when the employees exercise their options, the other stockholders take in the shorts as the pool of shares dilutes their worth.
In some ways, it's like issuing a bond but paid back in shares instead of cash when it fi
Consider SCO (Score:3, Insightful)
Re:Consider SCO (Score:2)
Re:Consider SCO (Score:5, Insightful)
As an example, the corporation for which I work use to own a number of large facilities around the country. The land and buildings were owned outright so there were no loan payments to consider. A few years ago, all of the facilities were sold with the new owners granting a 20 year lease. This made the bottom line look really good that year. A few years later the rental expense is a significant impact that could have been avoided.
The executives who made that decision don't care. They made millions from it. Many of them took offers from other companies.
So, what's the solution? I don't know. I do know that executive stock programs have only made things worse.
Re:Fiduciary responsibility incentives? (Score:5, Insightful)
Options granted to employees are nearly always restricted in many fashions. For one thing, a percentage of the total grant is frequently vested over time - often 20% per year, giving a 5 year time period before fully vested. The company usually has the ability to call the options - that is, demand payment of the strike price - the average employee holding 20,000 options at $5 is probably going to be hard put to come up with $100,000 if demanded of him - most people would have to borrow on it, and you'll find few banks willing to loan against a privately held stock. The last time I checked, even a publicly held stock could only be borrowed against at 60% of market value. Many option holders would simply say "fergetaboutit" rather than go into debt on such a thing. Also, there may be peanlties associated with early "termination for fault" - i.e. you do something dumb and get fired and you lose all your stock options. Even once the options can be converted to tradeable shares, as a company insider many employees might be required to file public documents with the SEC announcing their intent to sell - now the world knows of their intent and can react accordingly.
The whole debacle about expensing them is about the biggest irrelevant effort made in a decade by the Financial Accounting Standards Board. In a public company, any investor that knows the difference between a put and a call is going to have his own rule of thumb for the value of an option - after all the thing is simply a promise that a share may, if desired be purchased at some time in the future - it's got nothing to do with the present day financial health of a company, and is a very hazy factor in the future potential value of a company's shares.
Expensing options is nothing but a big press deal - disclosure of options is all that is needed, and that is required to be done in publicly held companies already. A clear rule set of how they should be disclosed would be beneficial, but it seems no one is talking about that.
Re:Fiduciary responsibility incentives? (Score:5, Insightful)
But lets put that aside for a bit. The real problem is that not expensing options is far too easy to abuse. Company grants options for 50 million shares. When options are exercised, company issues 50 million more shares. This doesn't impact the company bottom line at all. There is still no expense incurred. The only measurable effect is that earnings per share goes down. Then after several years of this, the company takes a one time charge to repurchase the stock they issued to cover the options.
That's not even taking into consideration the dilution of ownership caused by excessive option granting.
Accuracy (Score:3, Insightful)
But at least other things in accounting can be measured with modest accuracy.
Re:Accuracy (Score:4, Interesting)
There is no reason that options shouldn't be expensed. Options are used as employee compensation. You expense payroll why WOULDN'T You expense options.
FYI In the foot notes you do get the number of outstanding options and their diluitive effect on the outstanding shares but nobody reads the footnotes. Hell I think most people don't even read the financial statements.
Well duh. (Score:5, Insightful)
Re:Well duh. (Score:2)
No "duh" (Score:2, Interesting)
Stock dilution (Score:3, Insightful)
The only way to stop this is to buy back stock, which is a huge expense.
Yes "duh". (Score:5, Informative)
The REAL issue with whether options should be expensed or not is whether the diluted EPS captures the full effects of dilution through options issuance, or if there are hidden costs. There's a non-zero "option value" to the options (the choice not to exercise if the stock price drops), that is distinct from the "intrinsic value" (roughly equal to the strike price minus the current price). The argument is that this is presently not captured in the accounting regulations.
For more info on share dilution, check about.com's primer [about.com]. There's also a section in there on common tricks companies use to hide dilution effects [about.com].
Re:Well duh. (Score:2)
I oppose the expensing of options because there is often no good way to value them, particularly in the case of a startup offering them in lieu of cash (which is often where they do the most good from the business's point of view, and where rules requiring them to be expensed are likely to hurt the business's viability the most).
Option grants and the associ
Re:Well duh. (Score:2)
I agree that the full value of options shouldn't be expensed, where else in accounting are opportunity costs expensed out? Though I do think the original purchase of the stock for options needs to be recognized.
Re:Well duh. (Score:2, Insightful)
I'm guessing further that if the stock options are expensed, the "possible layoffs" will become "definite layoffs".
I'm guessing still further that the reason your company is spamming you to oppose option expensing isn't so much because they care about preserving your job, but because they care about preserving the company itself (and all the jobs in it).
I'm guessing still further that you t
Re:Well duh. (Score:5, Interesting)
What it DOES do is validly reflect that it *does* cost the company value to have granted those options. Had the company not issued those options they could have sold those shares at full market value and had that much more cash. Effectively that *is* what the company is doing, and handing that cash to the optioned employee.
The difference between giving the emplyee that option and him selling the stock, and the company selling the stock and giving the employee the option value in cash, it is pure bookeeping games. The final result is the same therefore the final accounting totals should be the same.
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Re:Well duh. (Score:3, Interesting)
No, you're guessing wrong. Like the parent post said, his options aren't worth anything, and chances are he is not going to be offered any options any time soon.
The people that should be worried are the *executives* of the company. Nowadays, the only people benefiting from options are top executives. When their options aren't worth anything, they simply reissue themselves a new batch of opt
I guess the industry is maturing... (Score:2)
Cost of stock options (Score:5, Insightful)
Options have value, and people will pay for them. By giving them away the company is basically giving away money. To say there is no cost is not accurate, and the owners deserve to have the most accurate picture of comapny finances available.
Re:Cost of stock options (Score:3, Insightful)
Options have value, and people will pay for them. By giving them away the company is basically giving away money. To say there is no cost is not accurate, and the owners deserve to have the most accurate picture of comapny finances available.
The question is how you record them.
No, they are not an expense when they are issued.
No, they are not an equity when they are issued.
Yes, they are an expense and an equity when they are excersized.
Given the volitility of the stock market, what IS the ex
Taxes (Score:3, Interesting)
It makes no difference to their taxes (Score:2)
Its just a number reported on the company statement and accounted for in the profit figure. If you don't agree with it, just add it onto the profit to get the old number.
Re:Taxes (Score:4, Interesting)
Yes , the companies would get a tax break by this ( their taxable earnings would be lower ) , but a lower earnings would also drive their stock price down.
Imagine the effect on stock price of everyone's favorite enormous software company if they were to report employee stock options as expenses. It would nearly wipe out their earnings , which would drive their stock price down precipitously. Which amusingly enough would also drive down the value of the stock options themselves ...
Re:Taxes (Score:2)
Re:Taxes (Score:2, Informative)
This would affect book income, not taxable income.
Re:Taxes (Score:3, Informative)
Yours,
Jordan
Re:Taxes (Score:2)
Here's a quote from Senator Carl Levin's website
YES! (Score:3, Interesting)
I think it's a horribly dumb idea to pump up corporate profit on paper just so the tax man can take a bite bigger than your real profit out of your fake profit. I guess that's one of the problems with publicly traded corporations though - shareholders are often too uneducated to realize that long-term gain is more important than short-term illusion of profit.
Re:YES! (Score:2)
My impression is that this like "dolphin-safe" tuna. No company wants to stick their necks out to voluntarily take it on, but if it's universally forced on them from the outside, it affects everyone, everyone's balance sheet will take the same hit (more or less, especially when comparing within an industry) an
Re:YES! (Score:2)
I am not a certified accountant. But I presume an unexercised option would be considered a liability. If it expires, the grant would simply be reversed.
I would assume that the strike price would be accrued when the option is issued and then the difference to market value would be accrued when it is exercised.
they must be expensed (Score:2)
Warren Buffett's take on it (Score:5, Informative)
Chris Mattern
Re:Warren Buffett's take on it (Score:4, Insightful)
A response to Buffett is here [catallarchy.net].
I have to agree. Issuing options (or additional shares) imposes a cost to existing shareholders via dilution, but the total value of the company is unchanged. The company is just transferring equity from one group of investors to another.
Re:Warren Buffett's take on it (Score:3, Insightful)
Re:Warren Buffett's take on it (Score:4, Interesting)
Right now, companies already expense the cost of the capital appreciation of the share sold when the option is exercised. How? Stock buybacks. When a stock option is exercised, the employee is sold a share out of the option pool (which usually means there's no dilution). The company books this cash as a share sold, just as if it was sold on the open market (but at the lower option strike price instead of fair market value). Eventually, that share is bought back (most companies continuously buy back shares) and the cost of that buyback is expensed. What is up for discussion is if/how to expense the option value of the option, not the capital appreciation of the underlying share.
Also, consider that many of these options will go unused, either because the employee leaves the company before they vest or because the options are underwater when they expire. The FASB recommendation permits companies to make allowances for these situations, but those allowances will always be wrong. The FASB permits similar allowances for bad debt and other estimations on the pro formas, but those entries are made up of many transactions, and they will statistically approach a historical value. Stock options are typically granted to many employees at once with the same strike price. This will appear as a single transaction-- instead of multiple, offsetting errors, companies will have single, large errors. This will drive more volatility than the other estimations on the pro formas.
I agree with Buffet that options clearly have value-- otherwise employees would not value them as compensation. I also agree that some method should be employed to correct the pro formas for options. But, the two major mechanisms recommended were designed to estimate fair market value, not the impact of an opportunity cost to a company's financial situation. I think using them in this way is not accurate. In fact, I think it will make the pro formas less accurate.
In the interim while we wait for the accounting wizards to come up with a better solution, I think it makes sense to just continue doing what most companies do today. If you look the 10-K for most companies, you will find extremely detailed option data. Using this data, you can compute the "expense" to the company in any way you find best. If the SEC requires companies to bake this in to the pro formas, it will be much more difficult to unwind the financials to use your own technique.
Yes, it will be more effort than just looking at the Net Income line or doing a quick ratio (or a Quick Ratio). But, investing in individual securities is not for amateurs (and I include myself if this category). That's what mutual funds are for.
Value of options (Score:2)
They do have a cost, just it is an unknown future cost. The problem with not costing it is the future liability is not accounted for.
Re:Value of options (Score:2, Insightful)
Yes, but that future cost may be zero. The employee may leave before the options vest, or the options may never get above their strike price, hit their experation date and disappear. The future cost may be zero, or it may be significant. Today, public companies list their outstanding ESOP on their 10K SEC filings, and then either buy back stock to compensate for exercised options, or just let the options dilute the share pool. Either way, investor
Re:Value of options (Score:3, Informative)
Re:Warren Buffett's take on it (Score:5, Informative)
No. We have tools (eg, Black-Scholes valuation model) for calculating the value of options. Consider insurance companies. They get a great revenue stream from all these people they insure. But with that, they get liabilities which may or may not occur. It would be incredibly stupid for an insurance company to ignore an insurance liability on the grounds that it might not occur. Otherwise, in good years you might earn an extraordinary profit, and in bad years lose it all and go bankrupt because you didn't keep track of the liabilities.
Stock options are potentially huge costs to a company. Ignoring those costs is foolish.
That depends. (Score:2, Interesting)
Will my stock be worth less when those options are exercised, en masse, by employees fleeing a sinking ship? If the answer is yes, then companies should expense stock options.
In fact, it's amusing that this even requires discussion. Options are like any other debt, except that the eventual cost of paying off that debt is unknown. Companies are required to report outstanding debt. Why should options be any different?
Re:That depends. (Score:2)
Re:That depends. (Score:2)
There's no indication of the cost of those options to the shareholder currently. Management knows the number, the shareholder isn't told it.
"The real question is, why bother to have companies make a pie in the sky estimate as to the value/cost of those options when they are granted, when, at the time of granting, they have no current cost or value, and may never?"
Because by the time the shareholder finds out what those options cost, they
No way! (Score:2, Insightful)
Do you use GAAP? (Score:2)
Black-Scholes Model (Score:2)
goodwill (Score:3, Interesting)
Goodwill, to first define, is the premium paid for another company above what they are physically worth (buildings, equipment, patents, etc.) Therefore, if Co. A buys Co. B for $20 mil, and there are only $15 mil of physicaly goods, $5 mil is goodwill.
So the question now, is why expense (impairment is the technical term) it if the value of goodwill goes down? Because it is a consistent treatme
Re:No way! (Score:5, Informative)
If you think Enron and Worldcom cooked their books, just wait until you see how the "expense" of stock options winds up being calculated.
They'll play with it, of course, but how can expensing the options at any positive value be worse than the status quo? Most companies currently take no hit whatsoever for issuing options; it seems much better to argue about whether the cost ought to be larger or smaller than to ignore the cost entirely.
It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".
"Goodwill" does not mean what you think it means. It's not the case that businesses estimate the dollar value of their reputations, as the word might seem to imply. It's a trick used to account for what happens when a company purchases another company. Suppose you want to buy my business, which consists of a factory and other physical assets, a large, loyal customer base, an excellent, widely-recognized brand and a bunch of great employees. Clearly, the employees, the brand and the customer base are all valuable to you, and are the real reason you want to buy my company. But the employees, great as they are, are an expense from an accounting point of view, and the customer base and the brand are irrelevant.
So, suppose you agree to pay me $100M for my company, and the factory and tangible assets are only worth $20M. That means your balance sheet will show a $100M debit and a $20M credit. On paper, your company just lost $80M by buying mine, even though everyone agrees that my company's future earning potential is well worth $80M, because of the above-mentioned factors. It would be inaccurate to show that the value of your company declined by $80M as a result of the purchase. Maybe the value went up, maybe it went down, but as far as anyone knows now, it was a fair price, meaning you got what you paid for, so you broke even, from an accounting point of view.
The solution is "goodwill". Your accountants will record a $100M debit to cash, a $20M credit to tangible assets and an $80M credit to "goodwill". If, a few years later, you determine that that division of your company is now worth only $60M (fair market value), because the market for its products declined, or you just didn't manage it well, then you will reduce the "goodwill" on the balance sheet accordingly and take that hit as an expense. Assuming the factory is still worth $20M, my "goodwill" is now worth $40M, so you'll apply a $40M expense, reflecting the actual decrease in value of your company.
I'm sure I've got this at least partially wrong, hopefully a real accountant will chime in, but that's the gist and it is a sensible approach to solving a real problem.
Re:No way! (Score:3, Informative)
I'm sorry, but that is just wrong. The idea that stock options don't have a clear value will come as news to all the investment banks in the world that trade options, and have to mark their P&L accounts to market every day. Beginning with Fischer Black and Myron Scholes in 1973, there has been continuing work in devel
Don't mix things up! (Score:5, Insightful)
Individual Employee's options are a great way to retain employees, keeping them motivated and having them think big picture, but they just can't fake the bottom line.
And guess who's options would definitely go away?
Options are Options (Score:2)
The problem is tech companies have been dishing out options instead of wages.
Those are only worthwhile if the share price rises,
The shareprice rises if the profits rise.
The profits rise if the costs go down.
Wages are costs, so the simple act of issuing options+lowered wages causes the labour costs to reduce, the profits to increase and creates a fake "growth" in profitability.
You can increase the profitability growth next time b
Re:Don't mix things up! (Score:2)
>
> Individual Employee's options are a great way to retain employees, keeping them motivated and having them think big picture, but they just can't fake the bottom line.
>
> And guess who's options would definitely go away?
*ding ding ding ding ding*
Someone
Not IF but HOW (Score:5, Informative)
Excerpting from this recent article [sfgate.com] about the issue:
[The FASB board is the federal advisory board that's hashing out what should be done about expensing stock options.]
Re:Not IF but HOW, [ expense only the gains?? ] (Score:3, Insightful)
As CEO, I work hard to increase share price to benefit the shareholders. I somehow achieve my goal, then all my employees (including me) exercise/sell to reap the benefits. Suddenly my earnings take a huge hit. Boom, my stock price crashes. Sure, I could call it a one-time charge, but option exercise/sell is basically out of m
Wrong (Score:3, Insightful)
If you expense stock options when granted, you have to make an estimate as to their value/cost and use that in the financial statement. The problem is that, when granted, stock options do not cost anything to the company and have no dollar value, and they may never. It is likely that in most cases, the estimated value when they are expensed will be revised when the options are exercised.
Right now, companies do one of two things when options are exercised: they either grant new shares, diluting the existing stock; or they buy back shares (or use shares already held back) equal to the amount exercised so as to not dilute the stock. Both methods have their merits, but the point is that it is only at the time of sale when the true cost of the option is known. So why change the way things are working? I suppose we could force all companies to buy back instead of dilute the share pool, but, I really don't see any case for expensing them when granted.
Options should only be expensed when they are exercised, which is exactly what happens today. Why do we need to change?
Expense cost (Score:2)
You can currently buy stock options in the market, why not use a similar system?
Look at it from the shareholders viewpoint (Score:2)
Look at it from the shareholders viewpoint, would you want an estimate BEFORE you invest, or AFTER the options have been cashed in, your shares are diluted and you are screwed?
At the very least the accounts should have:
Profit before Options Expensing $2B
Cost of Options Expensing $3B
Profit after expensing options ($1B)
That way *you* are free to believe the company i
!options then compensation = salary (Score:3, Interesting)
If companies have to expense options, they'll drop the option programs as the expensing will kill profitability. Therefore companies will nolonger give out options (MSFT has already stopped giving out options), and thus the major $$$ form of compensation will be salary, and salary does not keep an employee at a company for a long time, as you can jump ship to another company easier to get a raise than to ask mgmt.
Plus many companies spend big $$$ repurchasing stock on the market to keep up the stock price.
Lastly, if options are expensed then only the execs will get options and not the workers in the trenches.
HockeyPuck ---> .
Re:!options then compensation = salary (Score:2)
Are there any slashdot readers left (Score:2)
Is IS having an impact already (Score:2)
I think... (Score:2)
Anyway stock options (on publicly traded companies) are cheap enough in almost all cases that you can fund them yourselves if you've got confidence in the company, right?
Assets vs. Expenses (Score:2)
Warren Buffet is wrong, options are not like standard compensation -- options don't walk out the
No - stop rigging the system (Score:2, Interesting)
What else do you expect from the president
Re:No - stop rigging the system (Score:2)
Absolutely. They'll be eating babies next. W
Re:No - stop rigging the system (Score:2)
Enron didn't die until they filled a phonebook with fake companies to hide their debt, and ran out of Anderson accountants to paper over the evidence. They would have died much sooner if they hadn't bribed so many politicians, most notably Bush/Cheney.
The "bottom line" is
Not profit PROFIT PER SHARE (Score:2)
The accounts are for the shareholders. It costs the shareholder. The shareholder holds a share, its not the profit, its the profit per SHARE they care about.
So increasing the shares decreases the shareholders share of the profits, even if the company makes the same profit.
dilution is not a corporate expense (Score:2)
Slashbots. (Score:2)
Stock options does not mean you are compensated with stock. That is a common practive but options mean you will be able to buy the stock for a certain price at a given time, not that you HAVE the stock now. So they have not given you anything other then an agreement to seel at a certain price if YOU DECIDE to buy at the time of the option. I had to take a number of accounting courses as part of my CS program let me assure you if a co
No, not accurate or effective. (Score:2)
That said, expensing doesn't address the real issue correctly.
What happens when an option is issued, from a financial point of view, is absolutely nothing. No expense is incured, no income is acrued, no increase in the share count occurs. It is a big zero from a financial point of view.
But yet FASB, wants to force a calculation of expense to be
FASB also wants disclosure of the number (Score:2)
If you believe that then you are free to add the number back onto the profits to get what you believe is a real number.
However others may disagree, I for one.
I invest in a company for it to grow, so of course the options will reach strike price and will cost money, otherwise I would
Re:FASB also wants disclosure of the number (Score:2)
Re:FASB also wants disclosure of the number (Score:2)
But isn't that just hiding the devil in the detail? There may be thousands of differing options types within a company, so calculating the number from the mass of the detail is simply beyond the bulk of the shareholders.
In effect you put up a forest to hide a single t
Thinking About the Bigger Picture (Score:2)
They should be expensed when awarded and exercised (Score:2)
However, when the options are actually exercised, the company should also expense any difference between the initial valuation and the actual profit made when exercised. If they are exercised with a smaller profit to the em
they should GPL the stock options. (Score:2)
I heard over on groklaw that MSFT was unfairly leveraging their mid-level business software unit for stock option dispersal in the M
options are like money under the table (Score:2)
Options are being abused in my opinion, and requiring them to be expensed is simply a formal way of reporting to investors how the company is spending the profits. If I own stock in a company, I want to know how many options the executives are getting. Its very telling to me.
Two Words (Score:2)
ENRON, Adelphia, Worldcom - pick the scandal and they have screwed lower-level employees with worthless options and tossed loads of cash at the top boys with the same tool: stock options.
If there were rules requiring the company to "expense" an option we would have some, small, check on the value of these things. As it is today, the value (or the right to exercise the option) varies greatly.
If the company had to expense options (and, thereby disclose the classes of options they provided) and th
Giving real shares and not options (Score:3, Interesting)
However, I favor stock option expensing, even though it would most likely reduce the number of options that are awarded to employees (since the company would have to bear an increased accounting cost for each option that is awarded). The reason is that it is more honest. The profit from exercising stock options comes out of the pockets of the stockholders who were suckered into paying full price for the stock! As a stockholder, I am annoyed that optionholders can "stealth" themselves from company expense reports, as is currently done.
Microsoft has a truly good idea, that I read about a while ago: issuing real shares of stock, not just options. This neatly avoids the entire debate regarding the accounting of stock options. Employees would be paid in real shares of stock, in addition to cash. This has all the benefits of encouraging employees to take a stake in company performance, as options do, and motivates employees to want to make the stock price rise.
Issuing real shares of stock would easily be accountable, and would also have added the benefit of being fair to all employees, not just the few who got in early and got the coveted "below-a-dollar" options....
Private start ups (Score:3, Informative)
"Stock options are the most powerful incentive we have to attract employees," Andy Bechtolsheim, a founder of several Silicon Valley companies, including Sun Microsystems, told the demonstrators. "Why else would someone leave a large company and take the risk" of joining a start-up firm?
Without options, three out of four start-ups that succeeded in Silicon Valley would have failed, because they would not have been able to attract high-quality employees, Mr. Bechtolsheim said.
This does not make sense!
A start up is not public. They do not have to put out a report to the public every quarter. Expensing options do not have much of an impact on start ups.
And companies can still give stock options if they expense them. They just will not look quite as profitable on those quarterly statements.
Let the market decide (Score:3, Informative)
Other people will gladly take risks in companies that do whatever the hell they want in granting and expensing options.
Maybe one party will make money, maybe both, maybe neither; you pays your money and you take you place at the table WRT betting on risks/rewards.
Of course I realize that I have little chance of catching the next totally hot startup, but I've studied a hell of a lot of accounting and IMO a company is only as good as the accounting method they use; anybody throwing money around in the market who doesn't know GAAP and SAP and the difference betweent them is a fool- they still might be a lucky fool, but still a fool.
no, stock-options are NOT an expense (Score:3, Insightful)
See The Great Accounting System [mises.org]
The Stock Market, Profits, and Credit Expansion [mises.org]
Accounting for the Austrian School [mises.org]
Should Stock Options Be Expensed [mises.org]
The Financial Account Standards Board disagrees wi (Score:3, Insightful)
Where does that money go, hmm? If a stock is $50 per share today, and you exercise your option to buy that stock for $2, what happened to that $48?
Re:The Financial Account Standards Board disagrees (Score:3, Interesting)
Stocks are "worth" what anybody is willing to pay for them -- a stock quote is just the going market rate at that point in time. Companies that give shares of stock as options are simply agreeing to sell the shares at a pre-determined price, either absolute or as a percentage of the market rate (depending on how it works at the company in question or in the contract).
Imagine I have 3 million widgets which other people are willing to pay me $50. But I like you, so I say, "benzapp, you're doing a good job. I
The proposed rules are stupid (Score:3, Insightful)
Options should be expensed when they are exercised. Not before.
The figure listed isn't necessarily a bad thing, and would be useful to project the outstanding value of outstanding options the copmany currently has, but it shouldn't be treated as an expense because the figure is misleading and hides the true operating costs of the company.
The question is... (Score:4, Interesting)
So the question is, what's the most disadvantageous for Microsoft?
60% drop in earnings (Score:5, Interesting)
According to Bear Stearns, there would be a 60% drop [sfgate.com] in profits if the new rule were imposed. Think about it. Earnings in high tech companies are so dependent on stock options that these companies will "experience" a huge drop in profitability. Conversely, how can you support an accounting trick that buffs the profit of the industry by 150% (the reciprocal of a 60% drop)?
Bottom line. Profits are grossly overstated industry-wide. Why shouldn't we have accounting that reflects that reality? Why should we let this fiction continue? Are we going to forget the lessons of the dotcom bubble? Accounting tricks do work. And investors and employees can and are scammed by them. Finally, why do we need to fight so hard to get valid information about a company? It's just wasting our time which collectively is more valuable than that of a few company accountants.
See here [slashdot.org] for more discussion of this particular story. That's where I got the link BTW.
this might work... (Score:3, Insightful)
For a mature company, say MS to issue big gobs of stock to employees without expensing them and keeping the no longer unknown value off the books is a trifle ridiculous. At this point, this is just another form of compensation and as such should show up on the books as an expense. A.Lizard
Accountants, please answer this (Score:3, Interesting)
Re:Yes (Score:3, Informative)
Insider trading is when a person who has inside (not public) information about a company acts on stock (buys or sells) because when the information becomes public they believe the stock will take a turn one way or the other. This person may or may not be an employee of the company and for the most part this is done with normal shares, not options.
Re:Yes (Score:2)
No, it doesn't have anything to do with it.
Expensing stock options would essentially count the value of the options as an additional "payment" to the employee. Therefore, the company (and probably the employee) would have to pay taxes on it as it would essentially be income.
So for anyone who could get paid in stock options, you may have to pay taxes when you get them *AND* when you get rid of them. This is one form of "double taxation" that gets discussed over and over again.
Cute, huh?
Re:Yes (Score:4, Interesting)
Prevents Insider Trading (Score:3, Insightful)
new Stock (Score:2)
The 'loss' is that the company doesn't get the full value of what that stock would be on the market.
It doesn't matter if they bought it or create it, they are still 'out' that money.
If they buy it from the market this is obvious, if they just create it the 'loss' is that they could have sold it to the market to get that same money.
Re:new Stock (Score:2)
Dilution from options is a much smaller scale dilution than that which occurs from a 2nd an