by Mike Masnick

Fun With Accounting: How Damaging Will Stock Option Expenses Be?

from the does-it-really-matter? dept

This argument has been going on for years, and it seems like both sides are exaggerating either the need for or the damage that will be done by forcing Silicon Valley companies to expense stock options. In many cases, those in favor of the plan seem to believe that stock options are inevitably linked to fraud - which isn't true at all. While stock options can be linked to fraud, just expensing them doesn't change that. Most of the information (minus the somewhat arbitrary valuation) is already public information - it's just not as clearly noted in the financial statements. Thus, folks on Wall Street (and any savvy investor) should already know the impact of stock options on companies. Really, all this does, is shift some numbers around in the books - but doesn't impact real cash at all. For the people who the shifted numbers will really impact, the alternative calculations have already been done. The one shift may be that, due to the importance of "profitability," some companies may cut back on options because it appears to hurt their bottom line (despite having no impact whatsoever on cash flow). All in all, the big debate over stock options seems like a lot of talk over a very small issue. That said, I support the idea that we keep things as is - as the plan to expense them seems unlikely to correct any of the real problems with the system and seems more likely to create an additional accounting headache.

Reader Comments (rss)

(Flattened / Threaded)

  1. identicon
    Barnaby James, Jun 2nd, 2004 @ 7:03am

    No Subject Given

    I fear what will happen (and to a large extent has happened) is that stock options will be considered too "expensive" and companies will have to find other methods of compensation (like Microsoft switching to allocation shares or cash) which will impact the bottom line. The reality is that in the long term, most options are accounted for when the company does a stock buy back (which costs real cash). Granted some companies just keep issuing new shares but that effects the earnings per share anyway. The black-scholes model that everyone is so high on using to guestimate the future value of the option seems arbitrary - I don't know why (if options must be expensed) they don't expense the options when they are excised.

    reply to this | link to this | view in thread ]

  2. identicon
    w.h., Jun 2nd, 2004 @ 8:09am

    No Subject Given

    The problem is that there *isn't* a theoretically sound method of expensing stock options because they do not obey the restrictions that make the Black-Sholes work. This is why it makes a great footnote item.

    My major objection is that options were great for startups, which is where most of the things I find interesting were developed....

    reply to this | link to this | view in thread ]

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