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Should Companies Expense Stock Options?

michael posted more than 10 years ago | from the lottery-ticket dept.

Businesses 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?"

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GNAA BEGINS SALE OF DECAPITATION INSURANCE (-1, Troll)

Anonymous Coward | more than 10 years ago | (#9545224)

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Re:GNAA BEGINS SALE OF DECAPITATION INSURANCE (-1, Troll)

Anonymous Coward | more than 10 years ago | (#9545261)

Newcomer Lynndie England in the sequel to Lynndie Does Baghdad (2003):

Iraqui Investigations (2004)

featuring:

Lynndie England as Private Plowme

Dick "Head" Cheyney as General Boner
Filthy towelheads as gay niggers

DVD-Rip [ed2k]

--

Comments about Lynndie's performance:

Abu Ghraib "victim" Lynndie England's defense is getting shaky. Congress just saw a bunch of photos of Private England, ass-naked, having sex with a wide assortment of unusually desperate or possibly blind GI's. Guess we can dismiss her wide-eyed "I was forced to pose" exclamations. Congress may be stupid enough to believe your superiors forced you to humiliate Iraqis. I doubt they will believe you if you claim you were ordered to pose cracking for your coworkers.

Call me cynical, Private England, but a critical person could conceivably conclude that you're a disgusting piece of white trash with the morals of a goat in heat.

In fact, Private England's new photos cast doubt on claims that her intentions toward the Iraqi prisoners were always hostile. The new material shows her making the beast with two backs (or in her case, the beast with one and a half brains) in front of her charges. It's starting to look like at least part of the time, this little slut was trying to entertain the prisoners. So maybe we shouldn't think of Private England as a sadist. Maybe, in her own little way, she thought of herself as a humanitarian. While the rest of the military went after the Iraqis' hearts and minds, Private England made a play for their willies.

I really don't get it. Generally, it's not hard for women--even homely ones--to get laid. Ordinarily, they don't have to join the Army and fly to Iraq to get action. It's a simple matter of walking from your trailer to the nearest roadhouse. Or in the case of people with Private England's level of class, to your brother's bedroom.

What a funny time we live in, when skeezes have such power over international affairs. Supposedly, the fat, vacuous Monica Lewinsky was indirectly responsible for a bombing campaign. Now a uniformed tramp threatens to take down the Secretary of Defense and give the Muslim world an excuse to unleash its poorly concealed hatred of the West.

Neither one of these women have the brains God gave a goose, but look at their influence on the world. I suppose in a way, it's a lesson for people who say the sexual morality of public servants is irrelevant to their fitness for duty.

This pig needs a stretch in Leavenworth, and so do the men who posed with her. And just to be safe, they should put a combination lock on her pants so she can't do for Leavenworth what she did for Abu Ghraib.

zerg (-1, Flamebait)

Lord Omlette (124579) | more than 10 years ago | (#9545228)

This would put Microsoft in the red, right? So go for it.

Re:zerg (-1, Offtopic)

Anonymous Coward | more than 10 years ago | (#9545431)

There is no such thing as a linux-using Christian.

You can not go to heaven. If you were a real Christian, God would steer
you from the filthy and perverted GNU lifestyle.

your a fuckng idot! (-1, Offtopic)

Anonymous Coward | more than 10 years ago | (#9545510)

Hey guys my name is eddie i am a sophmore in highschool. I read about
this group on SSYGLB and how it is a good place for discussion which i
am always interested in. Today i guess you could say i was
enlightened. it wasnt by god or by a priest or monk not even a family
memeber. I am sure you all recently heard on the news or paper that a
young man from PA was beheaded in iraq. to be honest i didnt give it
much thought...i just said to myself that is what happens in a war and
we shouldnt be there anyway but thats beside the point. My friend
later instant messaged me about it and sent me the video of this man
being slaughtered by the masked terrorists. I couldnt help but cover
my mouth and widen my eyes. I wanted to cry but i felt it wouldnt
solve anything, at that moment i realized eveything that i have been
taking for granted. My family, my friends, even the people i dont like
or disagree with. i didnt come here to preach to you people but after
seeing what saw and then coming here for a somewhat healthy
conversation with this group and seeing posting with people saying
such horrible, degrading, superfluous things.. i cant help but feel
that we are no better than the linux-using faggots.

thank you.

Re:your a fuckng idot! (-1, Flamebait)

Anonymous Coward | more than 10 years ago | (#9545570)

You cum sucking, microsoft-loving worm. Why don't you lie about your age, join the army, go to iraq and get yourself beheaded? Then they could dump you in the sand to become fly shit, which would be easier than listening to you whine and bitch. Even the GNAA doesn't want you!

Re:your a fuckng idot! (-1, Flamebait)

Anonymous Coward | more than 10 years ago | (#9545608)

u know you want to frux @ my ass, just come out an admit it. if u do, i won't spit the cum back on your face this time, promise!!!! Linux-users go to hell even if they repnt of there fagdom and use microsoft for there rest of there life!

fp!!! (-1, Troll)

psycho8me (711330) | more than 10 years ago | (#9545230)

I rock!!!!

Re:fp!!! (-1, Offtopic)

Anonymous Coward | more than 10 years ago | (#9545258)

no sir, I'm afraid you fail it.

Re:fp!!! (-1, Troll)

Anonymous Coward | more than 10 years ago | (#9545284)

U m8 it! u raely m8 it!!

0 w4it, n0 u dint m8 it, sry.

Yes (0, Troll)

ckim (543024) | more than 10 years ago | (#9545232)

Yes I think companies should. It prevents insider trading.

Re:Yes (3, Informative)

azulcactus (583146) | more than 10 years ago | (#9545352)

It actually has absolutely nothing to do with insider trading.

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 (1)

caseydk (203763) | more than 10 years ago | (#9545424)


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 (3, Interesting)

Valar (167606) | more than 10 years ago | (#9545552)

Actually, in most cases, stock options are all ready prevented from insider trading. This is how it typically works: you get hired by a company and has a hiring bonus they give you some shares. Also, every X days, you have an option to buy more shares at an 'option' price (usually the market low during the X days). At the same time you have an option to buy shares, you can sell them. Because you can only buy or sell during designated times, you can't time your option purchases around news from your company. Most insider trading cases involve people in the company calling up their freinds with 'tips'. Normal shares are used.

Fiduciary responsibility incentives? (5, Interesting)

Anonymous Coward | more than 10 years ago | (#9545238)

How is the offer of options a "fiduciary responsibility incentive"? With an option, you have no downside, so you have an incentive to gamble all the firm's money on producing a temporary rise in the stock price.

Perhaps this was a typo for "fiduciary irresponsibility incentives"?

Re:Fiduciary responsibility incentives? (4, Insightful)

fname (199759) | more than 10 years ago | (#9545549)

Ya, I thought the same thing. It forces one to question if the submitter even understands what an option is.

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.

Consider SCO (2, Insightful)

Nakito (702386) | more than 10 years ago | (#9545624)

Indeed, there is no necessary correlation between a company's stock price and its profitability or even its value to society. SCO is a fine example. The factors that drive stock prices can be completely independent of the factors that drive profitability. If incentives were based on profit sharing, or sales, or other tangible positive values, instead of stock options, the incentive would be to make the company profitable rather that to drive up its stock price. Accordingly, stock options may well create an incentive to breach fiduciary duties rather than to support them.

i have one question.... (1, Funny)

Anonymous Coward | more than 10 years ago | (#9545239)

Can all that be translated to English please?

Huh? You say that is English? We're in trouble......

Accuracy (3, Insightful)

BobPaul (710574) | more than 10 years ago | (#9545241)

Mr. Casey acknowledged that "perfect accuracy isn't possible." But he added that "lots of other things in accounting are impossible to measure with perfect accuracy."

But at least other things in accounting can be measured with modest accuracy.

accounting (0)

Anonymous Coward | more than 10 years ago | (#9545441)

Several interviewees are asked the question, "How much is two plus two?"

Mathematician: "Exactly 4."

Economist: "Four, plus or minus ten per cent."

Accountant: (locks door, closes blinds) "How much do you want it to be?"

Re:Accuracy (1)

1ucius (697592) | more than 10 years ago | (#9545628)

You bring up my general concern with expensing options -- as I understand the things, assigning value to a nonmarketable option is a Nobel-prize-worthy problem and the result usually depends upon several hard-to-calculate factors. I suspect that this calculation will become yet another way for CFO's to manipulate the numbers. If I were an influencial investor, I'd rather see options counted as outstanding shares for EPS quotes - not a perfect solution, but at least it's an objective number.

Well duh. (5, Insightful)

Senator Bozo (792063) | more than 10 years ago | (#9545250)

Options dilute the value of the company stock, and since shareholders are the owners of a company it only makes sense to list them as expenses.

Re:Well duh. (1)

retostamm (91978) | more than 10 years ago | (#9545272)

Depends. The company can of course buy stock from the market, trough a buy back program. That allows them to give covered options at very little cost, without any dilution of the stock that is out there.

No "duh" (1, Interesting)

JohnQPublic (158027) | more than 10 years ago | (#9545276)

Options are issued from an "options pool". In any company large enough to be subject to FASB rules, that pool has already been set aside for that purpose. The dilution happened to the early investors (angels, pre-VC folks, etc.), which it was a small private company.

Stock dilution (2, Insightful)

nuggz (69912) | more than 10 years ago | (#9545524)

Every single additional stock dilutes my share of the company.

The only way to stop this is to buy back stock, which is a huge expense.

Yes "duh". (5, Informative)

nodwick (716348) | more than 10 years ago | (#9545526)

Uh, no. Stock dilution happens because the number of outstanding shares changes. The earnings and growth numbers that are used to valuate shares are calculated per outstanding share, so any change in shares outstanding creates dilution. Look at any company's 10K or 10Q; they'll have two lines listing earnings per share (EPS) and diluted EPS separately for precisely this reason: diluted EPS is what the company would earn per share if all the options were suddenly exercised.

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. (1, Insightful)

Anonymous Coward | more than 10 years ago | (#9545354)

My employer has been spamming me every week for the last couple months with email telling me that I need to write my congressman and senators and show up to a "ralley in the valley" to oppose forcing companies to expense stocks.

Of course, my response to my company is "fuck off you fucking shitholes". My company suckered me in with a ton of stock options during the heyday and before they vested, they were worth NEGATIVE a couple million dollars. Mine will never *ever* be worth a fucking thing. Plus, my company is going on and on about possible layoffs (we've already cut 30% of the company) all the time.

So really, why should I give a fuck? My company can go fuck themselves for all I care. They gave me shit and I'm supposed to help them out for it?

I guess the industry is maturing... (1)

Yaa 101 (664725) | more than 10 years ago | (#9545255)

I am for it...

Cost of stock options (4, Insightful)

nuggz (69912) | more than 10 years ago | (#9545275)

Yes it is a good idea to link company and employee performance. But when something is given the value must be recorded.

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 (2, Insightful)

einhverfr (238914) | more than 10 years ago | (#9545539)

IANACPA


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 expense of an option?

If I were creating an accounting system for this (and I am not a cerfied public accountant, though I do my own accounting for my business), I would do as follows:

1) Create a liabilities account for the strike price of unexersized options. And an expense account for losses on exersized options.
2) When an option is issued, it becomes a liability, which is usually paid with equity.
3) When an option is exersized it is paid with equity. The equity is deducted at *full market price* and the balance is debited to the expense account for option losses.

This seems pretty accurate to me. But the balance sheet will NOT show what the actual expenses are. Basically it makes the whole financial document system that much harder to navigate.

Taxes (2, Interesting)

NineNine (235196) | more than 10 years ago | (#9545281)

While I'm not as knowlegeable about financials as I should be, wouldn't expensing options also give companies a massive tax break, too? Seems like they would. They'd hit the bottom line, but tax savings would be tremendous, which would offset some of the "loss" proposed by doing this.

It makes no difference to their taxes (1)

NigelJohnstone (242811) | more than 10 years ago | (#9545319)

No it makes no difference to their taxes.
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 (4, Interesting)

Lupulack (3988) | more than 10 years ago | (#9545345)

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 (1)

NineNine (235196) | more than 10 years ago | (#9545385)

It wouldn't have much of an impact, since virtually every US company uses options, and they all would be affected equally. So relative to other companies, Microsoft would be in good shape, because while they do have a lot of options outstanding, they still have excellent, very steady earnings, and a sizeable amount of cash against neglibile debt. No matter how you cut it, Microsoft is still a blue chip stock, even though it's a relativly new company.

Re:Taxes (1)

demonlapin (527802) | more than 10 years ago | (#9545416)

I dunno. As Microsoft doesn't pay any dividends, there's a limited relationship between earnings and share value in the first place. I would think more of the value lies in the assumption that it will eventually participate in buy-backs of stock - what else is it going to do with the blinding torrent of cash? IIRC, they've got something like two years' worth of operating expenses in cash in the bank.

Re:Taxes (2, Informative)

BigHungryJoe (737554) | more than 10 years ago | (#9545426)

Book income is not the same thing as tax income. Most financial statements provide a note to the financials that detail the differences between the numbers.

This would affect book income, not taxable income.

Re:Taxes (2, Informative)

jordandeamattson (261036) | more than 10 years ago | (#9545632)

Yes, you are correct NineNine, that their is a tax benefit. The only thing, is that tax benefit doesn't occur until the option is exercised, whereas the expense is to be recorded at the time of grant.

Yours,

Jordan

More accurate (0)

Anonymous Coward | more than 10 years ago | (#9545293)

My understanding is that this would produce a clearer picture of the company's financial position. How could it be wrong?

I don't understand why this is even a question.

YES! (2, Interesting)

Stile 65 (722451) | more than 10 years ago | (#9545295)

Aside from the fact that expensing options makes for more accurate financial statements, it reduces a company's tax burden, thus making them more profitable in reality (rather than just on paper).

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! (1)

NineNine (235196) | more than 10 years ago | (#9545313)

shareholders are often too uneducated to realize that long-term gain is more important than short-term illusion of profit.


Hence the dot-com bubble... stupid investors.

Re:YES! (1)

Otter (3800) | more than 10 years ago | (#9545373)

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.

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) and life will pretty much go on unchanged.

Re:YES! (1)

Thng (457255) | more than 10 years ago | (#9545430)

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.


Not really. In the USA, there are basically two types of acounting standards: tax and financial accounting. The Congress makes and IRS enforces the tax standard, and the FASB makes (sometimes w/ prodding from the Gov't) and the SEC (only sometimes, unfortunately) enforces the financial accounting. In other countries, tax and financial accounting rules are identical, such as in Germany.

I don't remember the all of the discussion from my advanced accounting class last semester, but I believe this is an issue with the financial standards.

Re:YES! (1)

(negative video) (792072) | more than 10 years ago | (#9545482)

Aside from the fact that expensing options makes for more accurate financial statements, it reduces a company's tax burden, thus making them more profitable in reality (rather than just on paper).
I'm not clear on the accounting. What happens when an option expires without being exercised? Does the company treat it as income? Taxable income? At the market value at grant? At the strike price? At the market price? If the expiration value is different than the original granting expense, does the employee pay income tax on the "value" they received? Or is it a loss for the employee? Or is it both, and therefore a wash?

And if the company is paying an expense, then the recipient is receiving equivalent income. Does that mean employees have to pay income tax on stock options at the time they are granted?

Re:YES! (1)

einhverfr (238914) | more than 10 years ago | (#9545572)

What happens when an option expires without being exercised?

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.

Re:YES! (0)

Anonymous Coward | more than 10 years ago | (#9545571)

Aside from the fact that expensing options makes for more accurate financial statements, it reduces a company's tax burden, thus making them more profitable in reality (rather than just on paper).

It's the tax issue that irks me more than anything else. Though the cost of options is generally borne by the shareholders (through dilution), the issuing companies reap significant tax benefits. Certain well known OS and RDBMS companies have gotten billions of dollars in tax relief from their stock option programs. I'm all for tax avoidance but it pisses me off that companies are telling investors that they're making money hand over fist but save billions in taxes because of the "costs" of their stock option programs. Let's either fix the tax loophole or fix accounting practices. I really don't care which.

Options' cost are calculated already (0)

Anonymous Coward | more than 10 years ago | (#9545296)

Not a single company pays income tax without subtracting the value of their options first in order to lower their taxes. Why shouldn't they have to list this cost for their public statements, which is all the proposal is asking for anyway?

they must be expensed (1)

swschrad (312009) | more than 10 years ago | (#9545302)

and it should be Federal law. otherwise, it is an unreported drain on companies' earnings and a dilution of the stock, screwing investors twice. three times, when you consider that the goons running these outfits think screwing investors twice in a row is OK, and you wonder what other scams they are running.

Warren Buffett's take on it (5, Informative)

Chris Mattern (191822) | more than 10 years ago | (#9545303)

The most incisive analysis of expensing stock options I ever heard was from Warren Buffett, who can surely claim to know what he's talking about in financial matters: "If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And if expenses shouldn't go into the calculation of earnings, where in the world should they go?"

Chris Mattern

Re:Warren Buffett's take on it (0)

Tod DeBie (522956) | more than 10 years ago | (#9545414)

If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it?

Options, when granted, are not an expense. They don't cost anything and have no value. Only when they are exercised do they have value, and that may or may not happen. We should keep the status quo, where options are expensed only if and when they are exercised.

Value of options (1)

nuggz (69912) | more than 10 years ago | (#9545502)

If options have no value, why would anyone want them? The answer is that the value is their expected value in the future.

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 (2, Insightful)

Tod DeBie (522956) | more than 10 years ago | (#9545534)

They do have a cost, just it is an unknown future cost.
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, investors have all of the data about the options out there and how they will be managed. If any cost is actually incurred, then the company will report that. What is wrong with that?

Re:Warren Buffett's take on it (4, Informative)

khallow (566160) | more than 10 years ago | (#9545607)

Options, when granted, are not an expense. They don't cost anything and have no value. Only when they are exercised do they have value, and that may or may not happen. We should keep the status quo, where options are expensed only if and when they are exercised.

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. (2, Interesting)

gr3y (549124) | more than 10 years ago | (#9545305)

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. (1)

Tod DeBie (522956) | more than 10 years ago | (#9545455)

Companies are required to report outstanding debt. Why should options be any different?

They aren't. Check any public company's 10K. They will show outstanding options.

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?

Hmm. (1)

gr3y (549124) | more than 10 years ago | (#9545557)

From Microsoft's most recent filing [sec.gov] , dated 20030905, Form 10-K [sec.gov] [emphasis added]:

We follow Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees, to account for stock option and employee stock purchase plans, which
generally does not require income statement recognition of options granted at the market price on the date of issuance.

Am I reading that wrong? I understand the question is whether they should be required to expense options, which Microsoft is clearly stating that it is not required to do.

Re:That depends. (1)

NigelJohnstone (242811) | more than 10 years ago | (#9545617)

"Check any public company's 10K. They will show outstanding options"

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've already been screwed, the options have been excised and his shares are diluted.

Why exactly shouldn't the shareholders be told?

Profit before options expensing $X
Cost of options $Y
Profit after options expensing $(X-Y)

The cost of the options is calculated using FASB rules, just like depreciation, goodwill and so on. Why shouldn't the shareholder see that number?

No way! (2, Insightful)

JohnQPublic (158027) | more than 10 years ago | (#9545312)

Stock options don't have a clear value. Since you can't say "12,000,000 options are outstanding and excercisable, at a cost to the company of US$120M", you can't apply it as an expense. If you think Enron and Worldcom cooked their books, just wait until you see how the "expense" of stock options winds up being calculated. It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".

Re:No way! (0)

Anonymous Coward | more than 10 years ago | (#9545450)

If you think Enron and Worldcom cooked their books, just wait until you see how the "expense" of stock options winds up being calculated.

Oh please. Don't be so freakin dramatic. Countless predicted that MSFT would actually be losing money if they expensed their stock options (Bill Parish called it a pyramid and fraud).

Then they expensed them and weathered the accounting change just fine.

Yet another "expert" wrong.

Do you use GAAP? (1)

beldraen (94534) | more than 10 years ago | (#9545471)

So.. With that logic, I would presume everyone should use the write-off method because we never have a clear idea how much bad debt we should deal with? Do you follow GAAP? The point of book keeping is not to have perfect books (we all recognize there are some hard decisions about how to a good job of keeping books in order), but to have a reasonably faithful representation of what is actually occurring in the business. By treating stocks as something other than compensation when it is used for compensation and is not written as an expense, one is being unfaithful about representing the purpose of the stock. This is really no different than using Bad Debt Expense to tie the costs of written-off accounts receivable with periodicity. Just because I don't know what the value will because does not forgo me from trying.

Black-Scholes Model (1)

tunabomber (259585) | more than 10 years ago | (#9545503)

The most common way of pricing an option is using the Black-Scholes Model [wikipedia.org] . I don't really know much about the mathematical specifics of the model, but I'd expect that the "price" of an option as calculated by the Black-Scholes formula when the option was issued would translate into the "expense" that the company incurred. This is because it would be essentially equal to the amount that the people who were issued the options could sell them for- and compensation == expenses, to paraphrase the Warren Buffet quote that a previous poster brought up.

goodwill (3, Interesting)

Thng (457255) | more than 10 years ago | (#9545509)

. It's just as bad as requiring businesses to value their "goodwill" and take an earnings hit when it "goes down".

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 treatment of company especially intangible goods. If a company has a 15 years of a patent left to amortize, and for whatever reason it is invalidated, or maybe a new advance comes out making that patent obsolete,the comapny should properly impair the value of the patent, just as goodwill is now treated.

Two things we accountants like are comparability and consistancy. impairment of goodwill brings both of these to the table. After all, if SCO had any goodwill in the accounting sense, they should probably write off quite a bit of it, as they have likely drastically reduced the value of said goodwill.

thng

Re:No way! (4, Informative)

swillden (191260) | more than 10 years ago | (#9545605)

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.

Don't mix things up! (4, Insightful)

retostamm (91978) | more than 10 years ago | (#9545317)

I think one of the major problems in this discussion is that the Stock Options for the CEO types (equivalent of about 1000 employees options, if you count them) can cause wrong and fraudulent reporting in order to sell off the stock.

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 (1)

NigelJohnstone (242811) | more than 10 years ago | (#9545406)

Options are options, for the CEO or Account Manager they are all the same.

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 by issuing more options, and more and more and .... you end up in a situation where 44% of your profits are fake options tricks.

Re:Don't mix things up! (1)

Tackhead (54550) | more than 10 years ago | (#9545598)

> I think one of the major problems in this discussion is that the Stock Options for the CEO types (equivalent of about 1000 employees options, if you count them) can cause wrong and fraudulent reporting in order to sell off the stock.
>
> 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 gets it!

Both types of options are the Same Damn Thing, as far as the balance sheet is concerned.

But as the poster points out - if I've gotta take a $10M hit on issuing options, I'm gonna budget $10M to spend on option grants, and you can be damn sure that $9M is going to fellow board members and C[A-Z]O positions, $900K to senior management, and $100K, in the form of 20-30 shares apiece, to the grunts.

If I don't have to expense options, I have the current situation: no cash comes out when I issue 'em. And if my stock's at $100 and the options have a strike price of $10, it doesn't cost me $90 to let my employees cash out -- indeed, my company makes $10 :-)

So like the previous poster said, in a world where stock options are expensed, I'm gonna make damn sure my pockets are lined (because I'm worth it!), and fuck the middle class grunts workin' for me.

Which is why I oppose stock option expensing. So let's look at the present situation by contrast.

Yes, there's shareholder dilution. Big. Fucking. Deal. It's the shareholders' money, stupid! They're allowed to dilute! That is, the board (that makes the decisions) is hired by the shareholders, not the other way around. Read a proxy statement; that's how it works. The board fucks up? Then the shareholders can fire the board!

And speaking of fuckups, what kind of a fuckup of a financial analyst do you have to be to not be able to looking for a line that says "Outstanding options grants", or checking the footnotes behind "Fully diluted"? That's your job!.

So if you're a widely-held public company, that's a lot of shareholders (many of whom are pension fund managers and who don't give a fuck about your employees) that you've gotta convince when it comes to the notion that the dilution that comes from giving the average joe some options is worth it in terms of having more productive employees. Cool. Capitalism in action.

By that same logic, if you're 5 guys in a cheap business park, those five guys are the shareholders, and by God, if they're willing to risk diluting their shares in the company in order to take a company from 5 people and $250K in revenue into 50 people and $25M in revenue (and for the 45 new hires -- to take the risk that it'll be $0 in revenue!), then by all means, let them. Equally cool. Capitalism in action here, too.

The only way we're going to move from a sharecropper society (work for the boss, financial security for senior management only) into a shareholder society (work for yourself, financial security is a function of what you make your employer-du-jour become) is to broaden the number of shareholders.

The present option system does that. The proposed FASB rules don't. And if Warren "Tax me more" Buffett and FASB "Options for Those With Country Club Memberships Only" don't like it, they can eat a bowl of dick.

Re:Don't mix things up! (0)

Anonymous Coward | more than 10 years ago | (#9545620)

"Stock Options for the CEO types (equivalent of about 1000 employees options, if you count them)"

Why on earth did you just make that up? It doesn't even make any sense: what would this "Executive Option" do that makes it different from 1000 normal calls?

I'm just curious, honestly.

Not IF but HOW (5, Informative)

schwaang (667808) | more than 10 years ago | (#9545334)

Realistically, options are an expense and pretending otherwise on the balance sheet is just gamesmanship.

Excerpting from this recent article [sfgate.com] about the issue:

The most potent criticism of the board's draft proposal to expense options when they are granted, came from an unlikely source: Mark Rubinstein, a finance professor at UC Berkeley's Haas School of Business, who helped develop the method.

"I was one of the inventors of the (board-proposed) model, and I say: Don't use it. It doesn't work," Rubinstein said. Companies should have to expense only the amount that an employee profits after he exercises the option to buy the stock, Rubinstein said.

That came as a surprise to the FASB board members.


[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 (0)

Anonymous Coward | more than 10 years ago | (#9545469)

Unless the option strike price granted is far BELOW market price as is the case with many executives' compensation - then the in-the-money difference should be charged as an expense at the time of grant, as well as upon exercise date if it goes above that price.

Re:Not IF but HOW, [ expense only the gains?? ] (2, Insightful)

PenguinOpus (556138) | more than 10 years ago | (#9545491)

Stock options have value and should be expensed somehow, but to "only" expense the gains when the employee exercises and benefits leads to all sorts of counter-productive results.

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 my control and could happen every quarter. In the end, shareholders and financial analysts would have to ignore this aspect of my earnings, which brings us back to the situation we have today.

Slashdotted already (0)

Anonymous Coward | more than 10 years ago | (#9545387)

here [ytmnd.com] is a mirror.

Wrong (3, Insightful)

Tod DeBie (522956) | more than 10 years ago | (#9545388)

Expensing stock options as proposed is not a good idea. Despite what many suggest here, it will not produce a clearer picture.

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 (1)

nuggz (69912) | more than 10 years ago | (#9545483)

The difficulty of expensing options should not be a barrier to accounting for them.

You can currently buy stock options in the market, why not use a similar system?

Re:Expense cost (1)

Tod DeBie (522956) | more than 10 years ago | (#9545508)

You can currently buy stock options in the market, why not use a similar system?
The fee to buy an options contract is very low. The real value will not be know until the options mature or are sold, much like employee stock options. So why should employee stock options be treated any differently?

Re:Expense cost (1)

1ucius (697592) | more than 10 years ago | (#9545560)

Incentive options usually have very different terms than those sold on the market.

Look at it from the shareholders viewpoint (1)

NigelJohnstone (242811) | more than 10 years ago | (#9545514)

"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. "

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 is making $2B profit, and *I* am free to believe that its a fake profit done by paying wages with options.

Re:Wrong (1)

MisanthropicProgram (763655) | more than 10 years ago | (#9545621)

An Option gives someone the right to buy at a certain price for a certain time period - agreed?
So, the way I would approach it (simply) would be to say that the option gives you the right to buy 1,000 shares at $1 - so, I would expense $1,000.00.
You could get more sophisticated and plug those values into the Balck-Scholes option model [bradley.edu] to get a more "accurate" value.

And... (0)

Anonymous Coward | more than 10 years ago | (#9545410)

..what the hell does this have to do with /.?

How are options currently handled? (0)

Anonymous Coward | more than 10 years ago | (#9545429)

Okay, how are stock options currently handled? My understanding is that they appear on the balance sheet when the employee actually exercises the option. At that point the company has to buy the stock on the market, collect the option price from the employee, and eat the difference. Is that right? Or does the company just create the new stock on the fly when the employee exercises the options?

new Stock (1)

nuggz (69912) | more than 10 years ago | (#9545464)

The company creates new stock.
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.

!options then compensation = salary (3, Interesting)

HockeyPuck (141947) | more than 10 years ago | (#9545444)

I've worked at dotcoms and now a large company which gives out stock options to its employees. Until i joined the large company I didn't realize the value of options (not a get rich scheme).

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 ---> .

Not just stock options (0)

Anonymous Coward | more than 10 years ago | (#9545454)

Actually, there is more to it than just stock options. Due to the proposed accounting regulations, this may also affect employee stock discount purchases as well. Some companies are talking of dropping their employee stock discount plans.

Why is this of value? If you can consider that some people working for their company can get a stock discount of 10-15% instantly get that 10-15% return on their investment (although they do have to sit on their stock for a little while or face some penalities). Just think, overnight those discounts can disappear and you're left playing the market like a regular Joe.

How this new regulation would affect performance pay? Don't know. Hopefully they'll increase, but corporations might line their pockets instead.

Yeah, I know, greedy bastard, but I like "free" money. Lets me buy the "free" beer.

Re:Not just stock options (1)

Tod DeBie (522956) | more than 10 years ago | (#9545465)

I think you are thinking about employee stock purchase programs (discounted stock purchasing), which has nothing to do with the subject of expensing stock options.

Re:Not just stock options (0)

Anonymous Coward | more than 10 years ago | (#9545566)

Ah you're right... the news story is on stock options. I was thinking of this story on employee stock purchase programs:
myStockOptions.com Urges FASB to Reconsider ESPP Accounting Changes [lycos.com]

Still trying to find the right FASB [fasb.org] document that goes into further details.

Re:Not just stock options (0)

Anonymous Coward | more than 10 years ago | (#9545615)

And here it is: FASB 123 proposal [fasb.org]

It's amended not to include ESPP at this point in time, but will be considered/reconsidered in the near future, as mentioned in Appendix A.

Give them an inch, might as well give them a mile.

Are there any slashdot readers left (1)

eltoyoboyo (750015) | more than 10 years ago | (#9545494)

Who get stock options? That's the better question. I know accountants and CEOs are nerds too. But, how many CEOs or memebers of the FASB read Slashdot?

Is IS having an impact already (1)

PierceLabs (549351) | more than 10 years ago | (#9545495)

I know for certain that due to these moves, my employer is already looking to replace stock options with something else. For me that's almost okay because its somewhat useless for me to get the option to purchase something in the future while my employer gets an immediate write off. It would be nice to get actual stock, cash, or some other perk - but an option requires that I both wait AND spend money - not always a meaningful benefit by any stretch.

I think... (1)

Simon Carr (1788) | more than 10 years ago | (#9545496)

Never accept stock options in the place of pay. Sometimes they work out, but they're also pretty cheap to hand out for the companies that do it.

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?

Not the way that they want it to be expensed... (0)

Anonymous Coward | more than 10 years ago | (#9545533)

I personally don't think stock options should be expensed until the options are exercised. But even if we do, they certainly shouldn't be done the way that they are suggesting.

If I understand correctly, they take the value of the stock, assume a gain of 5% every year for 10 years, and then take that value and add that as the amount of the option.

That is ludicrous. They need a better way that is far more accurate. Writing options should actually not hit earnings at all... The company needs to just create new stock, and write options on them or reserve them especially for their employees. Then there is no cost except for the cost of the shares themselves when the company actually buys the shares.

Re:Not the way that they want it to be expensed... (1)

Tod DeBie (522956) | more than 10 years ago | (#9545550)

Writing options should actually not hit earnings at all... The company needs to just create new stock, and write options on them or reserve them especially for their employees. Then there is no cost except for the cost of the shares themselves when the company actually buys the shares.
Well, you are correct that their is no earnings hit in your example, but there is a hit to share values because the shares outstanding would be diluted. If a company buys back (or holds back) shares to compensate for the dilution, then that is the cost and is shown as a hit against earnings today.

Assets vs. Expenses (1)

G4from128k (686170) | more than 10 years ago | (#9545564)

If a company buys a tool or a building, they don't expense it because it has on-going value -- assets are held and used for the ongoing value they create. If a company buys paper or electricity, they do expense it because such goods are used almost immediately - expensible items are consumed or flow through the company. By that logic, options are an asset -- they have ongoing value and they are not consumed.

Warren Buffet is wrong, options are not like standard compensation -- options don't walk out the door like a paycheck does. Instead, options are intended to increase the productive value of the company's workforce - having options motivates employees to work hard. The longer the employee has the option, the more work they are likely to do. This makes the option more asset-like -- the longer you have a tool the more use you get from it. Thus, options have and create future value in a way very unlike standard compensation. In many ways, options create assets out of human resources.

The double-edge sword of options is that they do encourage the employees and managers to try to inflate the stock price. Although most managers and employees boost the company's stock price through honest, hard work, some decide to screw outside investors through financial gimickry. But expensing options won't eliminate this bad behavior - if the company still uses options, the employees still have incentive to drive up the stock price (by unethical means if they are so inclined).

As a stock holder (0)

Anonymous Coward | more than 10 years ago | (#9545568)

Yes, they should expense options as expense. They shouldnt just give out thousands of share as paper money to employees. Reward employee with bonus or raises

Performance Measures (0)

Anonymous Coward | more than 10 years ago | (#9545586)

I find it very interesting that this is even an issue. Regardless of whether or not the value (however it may be determined) of stock options are reported as expenses in the financial statements, stock market analysts and investors will be able to isolate and (if they so choose) ignore the impact of stock-based compensation expenses on the profitability of the company in question. This, of course, assumes that the company in question is intelligent enough to disclose such expenses separately on the income statement. It also assumes that financial statement readers are intelligent enough to interpret and assess the impact of such expense. I grant you that this latter assumption becomes increasingly tenuous, as the complexity of financial statements increases.

My personal opinion is that I would rather have such information disclosed separately, so that I could assess the significance of a particular company's stock-based compensation expenses, relative to its competitors. For those of you still caught up in the difficulties in measuring the value of stock options, I pose the following question: "How accurately do you think public corporations can measure the value of goodwill purchased on acquisition of another company?" The difficulties associated with the initial measurement of the value of goodwill (and any subsequent impairment in value) far exceed those of measuring the value of stock options.

Not a good question for /. (1, Interesting)

Anonymous Coward | more than 10 years ago | (#9545587)

C'mon people... let's admit our limitations. There are very few of us qualified to even form an opinion on this matter (not that that usually stops us) and those few will just be drowned out by all of the crappy assertions made by the rest of us.

Options are nothing more than a promise to offer stock to someone at a fixed price in the future. If that fixed price is less than the market price, the company misses out on possible capital. This is the amount that people want to turn into an expense. How the heck do you account for that ahead of time? If you wait to account for it when the option gets exercised, it skews your earnings reports because of it reflects prior payroll, not current payroll. You can't just go back and drop it on the books for the date the option was given, because it'd be years before you could finally close the books on a given fiscal year.

In short, there is no simple answer for this question, so quit trying to find one and let the bean counters figure this one out. /So how 'bout them HP laptops?

No - stop rigging the system (1, Interesting)

Doc Ruby (173196) | more than 10 years ago | (#9545593)

Corporate expenses are incurred when a corporation buys something. A stock option, even when exercised, does not cost the corporation anything. It's a con game, to make less costly, high-growth infotech companies, which offer more options than industrial corporations, seem to cost more. Next they'll allow tax writeoffs for "opportunity costs", like letting Lockheed cancel its puny tax liability because it invested in laser missile defense instead of gas pipelines.

What else do you expect from the president who appointed the head of Alcoa, the practically medieval aluminum mining and manufacturing company, his first Secretary of the Treasury? Who proved unable to do anything to assist the bubble's soft landing, even when the rest of the White House would talk with him? The only thing President Vice President Cheney likes about tech companies is that they waste a lot of expensive electricity - so he'll make their finances as complex as possible, requiring his buddies at Anderson *cough* Enron *cough* Accounting to get their piece of the action if they show any green - cash - at all.

Options (0)

Anonymous Coward | more than 10 years ago | (#9545594)

I think that it would be a bad move to enforce these accounting changes. It is unfair to not just the employees, but the economy as a whole, as these options which are offered to employees add value to the markets, even if they cannot be traded in the immediate future. They help stabilize stocks which may otherwise have been screwed up because of speculative trading.

Slashbots. (1)

DarkOx (621550) | more than 10 years ago | (#9545602)

After reading some comments most here seem not to understand the issue.

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 company pays you in stock it is expenses already.

The knee jerk response to this is the matching principle which says you expense things in the accounting period that the expense is incurred, that is not always when its paid. So you say there has been no *real* transaction yet so there is no expense. Then you simply account for it like any other stock sale when/ip the employee buys the stock.

The problem is the rest of the accounting assumes an arms-length transaction. That is to say it works on the principle that things will be bought and sold at the market value, because all parties are aiming for their best interest. If you have a stock option you might be buying that stock for a much lower cost then the market value at that time. That effectivly means it is *costing* the company to sell you that stock.

The argument then is offering a stock option is incuring an expense because if your estimations are correct you will be selling for less its worth, why would someone want a stock option to buy for more then its worth? we can also guess that if we are way wrong and our stock goes through the floor nobody will exercise the option either.

If you estimate wrong you just make an adjusting entry later. The way I see it is that it probably should be an expense because I think companies tend to issue stock options with little conscience thought about the impact down the road, and or operate like the mail-in rebate scheme and assume a large percentage will fail to make good on the options, so they are suckering new hires to some extent.

No, not accurate or effective. (1)

jordandeamattson (261036) | more than 10 years ago | (#9545609)

I believe that the drive to force the expensing of options is rooted in a valid concern: currently, the impact of options on shareholders isn't properly disclosed.

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 made that may or may not have any ultimate connection to reality and then to have that expense charged against the company in question's earnings in that quarter.

When an option is granted, the only material thing that happens is that a potential obligation to sell charges at a set amount over a set period of time is created. This leads to the possibility that the ownership "pie" of a company may be sliced into some larger number of smaller pieces.

When an option is exercised, a few things happen. First, off the company gets an infusion of capital equal to the option grant price times the number of shares granted in the option. Second, the existing owners of the company (read shareholders) see their ownership interest decreased due to the additional shares that have been issued.

Let me illustrate the above points: if a company has 100 shares outstanding, and I am given and then exercise an option to purchase 100 shares at $10 a share, then the following happens. First, the company gets $1,000 (100x10 = 1000) in additional capital. Second, the existing shareholders see their interest in the company cut in half. Whereas, prior to my exercise of the options, they had 100 shares and owned 100% of the company, they know own 100 shares and own 50% of the company. This is called dilution.

How would I address the legitimate concern for clearly and transparently communicating the potential impact of option grants on a company? Well, I would require that the earnings per share number be reported as if all option grants currently outstanding were exercised.

Currently, companies report a diluted earnings number, but it isn't "the offical" number. Let's make the diluted earnings number the offical one.

This is better than expensing for a couple of reasons. First, expensing only shows the impact in one quarter. It doesn't show the true impact of options being exercised, which goes on and on and on. Second, expensing is an estimate. There is no accurate way to estimate the "cost" of an option grant. Both of these points should be a deal breaker for any accountant. Accounting has at its bottom line rule that first, the number be accurate. This includes that expenses should be matched against the events that generate them. An option grant doesn't an impact, it only has a potential impact.

Yours,

Jordan

Thinking About the Bigger Picture (1)

yancey (136972) | more than 10 years ago | (#9545614)

In my opinion, anything that leads to long-term stability of national and world economies is positive. It seems to me that there is a trend in the U.S. with large, quicky growing companies being irresponsible in the way they handle their finances. Because the stock market is speculative and therefore volatile during the fallout of these companies, a single company that folds can have a huge impact. I would like to belive that the market will eventually discourage this, but perhaps the allure of making quick profits and upper management being able to walk away with tens or hundreds of millions is just too powerful a temptation. In that case, I think it would be good for the economy and for the world for us to adjust the rules to moderate this tendency.

They should be expensed when awarded and exercised (1)

rollingcalf (605357) | more than 10 years ago | (#9545633)

At the time when options are awarded, their value and expense to the company should be expensed based on Black-Scholes or some other acceptable formula. The reason why they shold be expensed at that time is that they effectively represent an expected long-term liability to the company.

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 employee than their initial valuation, that difference should be added back to the company since that would represent a reduction of liability.

Similarly, when options expire without being exercised the initial valuation should be added back to the company's value as that expiration represents the removal of liability.

A combination of expensing options when granted and adjusting the expense when exercised or expired would provide the most accurate picture of their effect on the company's value.
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