DH and Others: This is how option accounting works under the old rules. Nothing evil. Excerpted from Yahoo- presented by very experienced CPA:
For the benefit of those still confused about how Rambus accounts for stock options and do not understand why the second fiscal quarter of 2000 showed an expense related to options compensation, here's another go at it.
There are two basic GAAP rules on how to account for the expense of option based compensation. Accounting Principles Board Opinion No. 25 is the old method and is the one most commonly used by public corporations. It is the method used by Rambus as noted in their annual report's footnote 2, Summary of Significant Accounting Policies.
From the report:
Stock-Based Compensation
The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Stock options are generally granted with exercise prices equivalent to fair market value, and no compensation cost is recognized. When stock options are granted with exercise prices below fair market value, employee stock-related compensation expense is recognized accordingly. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." See Note 7.
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Statement of Financial Accounting Standards No. 123 (SFAS 123) is the newer method that was proposed in 1995 and successfully defeated by the accounting lobby, Joe Lieberman, Billy Tauzin and other various scoundrels. It was supported by President Clinton and his SEC chairman Arthur Levitt. It now appears that it will become the new standard thanks to the recent scandals. Here is a good link explaining how it will work.
fawpir.com
Rambus explains in Note 7 how the application of SFAS 123 would have changed the results reported using APB 25.
So why did Rambus report an Employee stock-related compensation expense of $171,085,000 in the second fiscal quarter of 2000 if they are using the old APB 25 method?
The options issued were for LESS than the market price of the stock at the time. Look at the note above: "When stock options are granted with exercise prices below fair market value, employee stock-related compensation expense is recognized accordingly."
Here is the accounting entry:
Debit Employee stock-related compensation expense for $171,085,000
Credit Stockholders Equity for $171,085,000
If you want to put the cash back in the transaction, you can maybe understand why the compensation is recorded as an expense. Rambus sells enough stock on the open market to generate $171,085,000:
Debit Cash in Bank $171,085,000
Credit Stockholders Equity for $171,085,000
Give the cash to the employees as compensation:
Employee stock-related compensation expense of $171,085,000
Credit Cash in Bank $171,085,000
Management did not report the expense any differently than any other public corporation. Most options are issued for a price above the market value and no accounting entry is made at the time of issuance. This is the focus of the current political debate. Should this compensation be recognized and what value should be applied to this compensation? Gretchen Morgenson has written many articles on stock option expense and any google search would be well rewarded for those who seek further information.
JFD |
