Friday, December 17, 2004


Stock options to be expensed

From USA today

Count one for the bean counters.

After years of heated debate between high-tech companies and accountants, the head accounting rule-setting body Thursday declared all companies must subtract the cost of stock options from their earnings starting in mid-2005.

It's a massive blow for companies, mainly in Silicon Valley, which had been doling out lucrative stock options to employees and executives for decades but not counting them as a cost. It also requires investors to rethink how they value companies: The new rule will affect everything from price-earnings ratios to earnings estimates.

Accountants, thinking companies had been enjoying a loophole that understated their costs, applauded the decision. The new rule will have "a big impact, but it's the right move," says Ed Nusbaum, CEO of accounting firm Grant Thornton.
No, count one for the investor class. Let’s be clear: it’s not so much that shareholders of high tech companies don’t want options to be expensed; rather it’s the overpaid executives at these companies, who are the prime beneficiaries of intransparent option programs, who don’t want options to be expensed. The distinction is crucial. My prediction is that option expensing will have no adverse impact on share prices, and indeed over the long-run will have a beneficial impact, as expensing helps to curb excessive CEO pay and makes corporate accounting more transparent. The money grubbing insiders in America’s high tech companies, the very same people who made absurd amounts of money selling their shares to ordinary investors during the NASDAQ bubble, should collectively hang their heads in shame. Expensing of options is a victory for the investor class, and a victory for capitalism.

I'm an accountant and I think this is a terrible ruling. Under the old rules stock options had to be considered outstanding shares when computing earnings per share, therefore the impact of these shares was already included in EPS. Under the new rules income must be reduced by the estimated compensation expense and the number of shares outstanding must be increased by the shares under option. This hits EPS twice and basically constitutes double dipping. The impact of the options will now be overstated relative to EPS, which has a direct correlation to a company's stock price.
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