Hi Don Lloyd; Actually, our agreement that options should not be expensed at the time of exercise predates this thread:
November 22, 1998:
Hi all; About those options and GAAP... I disagree with
"Brian, that's an interesting thought. You could just
apply the Black-Sholes model at the time the option
vests." I would agree instead with: "Brian, that's
an interesting thought. You could just apply the
Black-Sholes model at the time the option" is
granted.
Otherwise, if the stock rises, the company will end up
showing a huge expense for a deep in the money option
(at vesting time) which was out of the money at the time
of grant. It makes as much logic to charge that to the
company as it does to charge the company for the change
in value of stock owned by the employees. Nope. Instead,
stock grants should be expensed at the time of grant.
But we've been through this before, to a great extent,
on this thread. #reply-6519682
You are right that the question that is key is what is it that the shareholders are giving up. The purpose of a P&L statement is not for the (non entity) company to tell its (non corporeal) self how financially strong its (fictitious) self is. Such an interpretation is not in the generally accepted accounting principles, and, in fact, isn't of much use for humans. Accounting is for the benefit of human beings, shareholders and prospective shareholders.
Accounting is not some secret mumbo jumbo that has application only for the creation of pointless figures on paper. It is a real world applied science that is for the use and benefit of humans, not companies. For this reason, SEC accounting is supposed to be done from the point of view of investors: the stock holders, and prospective stock holders.
Since stock options reduce the value of the company to the current stock holders, they have a value that is taken from the current stock holders and is given to the stock option receivers. If companies are having to give away stock in order to get income in the door, that giveaway has to be accounted in the P&L statement. It has to be accounted for as a current expense, at the time that it is made. The only real question is how should a number be generated.
The current SEC rules are for the value of employee stock options is zero. I believe that this underestimates both the value of the stock option to the employee, and the cost of the stock option to the shareholders. This inflates the value of companies, and is wrong. A possible replacement would be Black Scholes, but that is in some sense a worst case estimate. But accounting is filled what are effectively worst case estimates. For example, goods to be sold are valued at the cost of making them or the value on the market, whichever is less.
Valuing employee stock options at zero is not realistic, is that what you want? I think it is clear that the SEC rule violates the principles of accounting, and should be changed. The accounting profession did try to make that change, but they were stymied by people who did not want their companies to have to post lower earnings.
-- Carl
P.S. I only saw the lady one more time, it was about a year or so later... :{ |
