FASB Says Companies Must Expense Stock Options

from the not-what-the-industry-wanted dept

Here’s a holiday present Silicon Valley had been hoping to avoid. FASB has now put out their recommendation saying that companies should be forced to expense stock options. Plenty of Silicon Valley companies (and their political representatives) are up in arms about this, talking about how the rules are nearly impossible to follow. They will also lead to wildly inaccurate income statements, as the valuation put on stock options isn’t likely to reflect reality. They may also drive down the incentive for companies to offer stock options, which some companies believe will make it harder for tech companies in Silicon Valley to hire the best and brightest. What’s silly about this is that all of the information needed for anyone to calculate the “stock option issue” is available in the footnotes of financial statements, and all this is really doing is making the income statement less reflective of reality. Options are going to be expensed at rates that have little relevance in real life. However, with all of that said, it’s unlikely that this will have the major damaging effect that some in the tech community predict. There’s no real difference to cash flow. The changes in the income statement can easily be understood by analysts and serious investors. It may give some companies fewer reasons to use stock options, but employees may still demand them, and since the real impact on cash flow may be that it saves a company from having to pay higher taxes, companies may give in. For companies that choose to avoid stock options, you can bet that financial whizzes will quickly come up with alternative offerings that effectively do the same thing. The one thing this absolutely will not do, is cut down on fraud — which was what the original reasoning was behind the idea to expense stock options.

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