>>From Ron: "So getting back on point .. the stock-based compensation *expense due to option exercise* is not a real expense."
From the Accounting professor interviewed in the Wall Street Journal: "I personally side with those who think that a fair-value approach should be used in recording compensation *expense for stock-option grants*."
From Ron: "As to the Wall Street Journal article, I agree with every word."<<
OK. You're confused. Don't feel bad. I was too until I really took note of the prepositional phrases bolded above. Let me try another explanation I've used posting on other threads.
Ignoring expiration of an option, there are two important and distinct economic events in the life of an employee stock option: the grant of the option, and the exercise of the option. And the grant and exercise generally occur at different times.
Both the grant and the exercise events have transfers of value: a call option upon grant, and stock upon exercise. Either or both of these value transfers can and are considered, by someone at sometime, as employee compensation expense.
Unfortunately, often a writer is not aware of the distinction, OR a writer is just not careful to point out which value transfer applies, OR a reader misunderstands or is careless. (I have been trying to always say something like "due to option grant" or "exercise expense" in my posts because of this. I'm glad to see the professor did the same.)
So I was talking about option exercise expense, and the professor was talking about option grant expense. And I see no conflicts in the statements made.
If an author doesn't clarify the value transfer being discussed, look for clues. See tax benefit/credit/deduction, or IRS, they're hopefully discussing the option exercise. See Black-Scholes, intrinsic value method, fair value method, amortization, vesting schedule, or volatility, they're hopefully discussing option grant.
BTW, I saw no inconsistencies of my statements with the Levin/McCain statement you referenced. They could have been clearer about when the grant or exercise was being discussed, however. The statement discusses both.
A few tax comments: As you pointed out, if the Levin/McCain bill were to pass, treatment of employee compensation expense due to stock options would be the same in both the financial reports and IRS tax return. But they do not say whether "compensation expense due to option exercise" should be reported in the financials, OR the expense should not be claimed on the tax return. I think the later will occur.
My other comment about taxes is this. I don't think an option grant expense (SFAS 123) is being claimed to the IRS. See some of my other very recent posts on this thread.
Have you drawn that option exercise value flow diagram yet? If not, please do so .. it should help your understanding. Draw it, and try to figure out where that exercise expense should be added.
I hope this clears things up .. because I'm fresh out of approaches. Lots of opinion in this post, but based on fact to the best of my knowledge.
Ron |
