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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs
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To: Clarksterh who wrote (135)7/28/2002 3:35:49 PM
From: rkralRead Replies (1) of 786
 
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.
I assume you are referring to:

"Coca-Cola said it would expense all future stock option grants based on the fair value at the date options are granted. That value will be determined from stock prices received from financial institutions that trade Coke shares under terms identical to the options."

I suspect that KO is just trying to appear at "arms-length" from the Black-Scholes valuation of the option. In practice, this probably means institutions will determine the volatility and risk-free interest rate .. but KO will still need to guide the institutions in determined the "option life".

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.
As a hypothetical, let's assume a company can choose between claiming an expense of zero, or the intrinsic value of the option. Let's further assume that Levin-McCain S.1940 passes and expenses on the tax books and financial books must be the same.

Do you believe that companies will claim the expense in order to obtain the cash flow (due to the tax benefit) even though doing so will reduce the reported earnings?

... up to speed on all of the FASB stuff. Did you order a copy of some of the letters?
Kudo appreciated. I have purchased FAS 123 "Stock Based Compensation" and FAS 128 "Earnings". Have read a lot of 123, very little of 128.

Ron

P.S. Gotta run. Will add to reply later.
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