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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs

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To: rkral who wrote (133)	7/28/2002 12:22:32 PM
From: Clarksterh	Read Replies (4) of 786

rkral - Reply to post on other thread. You are right that currently the IRS 'earnings sheet' allows a deduction for options exercised by employees and the size of the deduction is equal exercise price minus strike price. But several points: 1) There does not seem to be a settled method of accounting for options. For instance Coke (and The Washington Post?) are using some obscure method for which I have not yet seen a good description. And then the pro forma reporting done in all of the 10Ks according to the FASB rules uses Black Scholes. And there is a thought, not unreasonable in my opinion, that the IRS earnings sheet and the GAAP earning sheet should be better sync'd up. Yes, we will probably continue to use the current IRS system, but it is possible that it will be changing. 2) Regardless of which method is used for accounting for options, there will be a permanent disconnect between the cash flow and earnings. Cash flow always matters to a company, earnings do not except in so far as they effect taxes and public relations. When this happens there is a strong incentive to do manipulate earnings in order to benefit your cash flow in the opposite direction. In fact one of the complaints given by the proponents of expensing options is that they wrote too many recently. Well of course they did since it was phenominally beneficial to their cash flow and still will be. BTW - You have really come up to speed on all of the FASB stuff. Did you order a copy of some of the letters? BTW2 - I have tried to find out whether total dilution includes only vested options or not, and although I am not sure I believe it is only for vested options. The only reason the dilution sometimes exceeds the number of employee options outstanding is that dilution includes warrants, ... having nothing to do with employees. Also note that the way dilution is calculated is, IMO, bizarre. It essentially assumes that no one ever actually exercises an option except the extent that they can get the required cash by selling the rest of the options. Thus the dilution for an in the money option is higher for lower exercise prices. Clark

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