The Potentially Pending Market Crash
Pardon me while I don my accounting geek hat:
There is a movement to mandate that companies expense all stock options when they are offered to the employee (though not necessarily redeemed). That is, record an expense on the income statement for the value of the options (which may not have been redeemed). Current treatment of stock options is done by showing diluted earnings per share, which is basically what earnings per share would be if everyone took advantage of offered stock options (and a few other things). The Senate has a bill mandating expensing these options. Politicos apparently feel this measure would lead to better information to the investor.
Some people (Greenspan) think that current accounting for stock options is used to distort earnings.
One thing that is often lost in this debate is that, essentially, a company is usually issuing treasury stock or unissued stock to employees. In other words, the companies are giving pieces of paper to the employees. Yes, these slips of paper have value but does the current method of recording this transaction reflect the financial position of the company?
I am increasingly of the opinion that accounting is made up. That is beside the point. What is going to happen is companies will soon show substantially higher expenses all because they give slips of paper to reward or compensate their employees. Functionally and operationally, nothing about the company will have changed but financial performance as measured under the proposed standards will suffer. And stock values may plummet.
Given that the market is on the rise, this is kind of silly. As best as I can tell, it is being done entirely for the appearance of cracking down on big evil corporations in light of the recent accounting scandals.
The Financial Accounting Standards Board is also debating the issue.
January 27th, 2004 at 8:54 pm
Said slips of paper do have value though and they have the effect of diluting my ownership in the company as well as my share of the profits. There is also the fact that many companies end up doing share buybacks at higher prices than the options to offset the dilution. This means that the employees are buying shares for $5 (lets say) and the company is buying them back on the open market for $10, meaning that each option exercised is costing the company $5 in real cash that is never reflected any where.
January 27th, 2004 at 10:33 pm
In some cases. But some (i.e., most that I have seen) options are unissued shares, which have value and dilute ownership, but have zero impact in terms of spending cash.