My gosh, GST, you really don't understand (or don't read) anything I've written, do you? Nor do you, apparently, know the first thing about how option plans work.
Nothing is ever forfeited and returned to the company unless the empoyee is fired before the options vest.
Failure to vest is exactly the forfeiture I was talking about, but contrary to your statement above, failure to vest can result from EITHER being fired OR quitting. You might also be interested in knowing, BTW, that most options plans provide for an accelerated expiration should an employee leave (for any reason) while holding vested but unexercised options. Under existing, though not mandatory rules, vesting or failure to vest IS a determining factor in WHETHER and WHEN the expense hits the books while any accelerated expiration is not a factor because those options have already vested and have been expensed.
To focus on the value at the point of exercising the options is to admit to knowing nothing about option premiums.
Who is focused on that? No me and not FASB. Only the IRS and the employee care about that.
The timing of the expense is different from the value of the option.
Well, duh! That's exactly what I've been saying. Value them at grant, but expense them when they are earned (that's earned, not exercised). Glad to hear that you finally get it.
when given as compensation the premium must be calculated by a formula ... The premium formula has yet to be determined. But there will be a premium formula. You do not accept this.
Don't accept what? When have I said you can't use a formula to estimate an expense? I WOULD suggest, and I may have already suggested, that it's always better to have an objective valuation rather than a subjective and purely theoretical one. An objective valuation might be based on offering the employee a choice between cash and an option and, if he choses the option, using the cash figure as the valuation. Another might be what an unrelated third party would actually bid for the same option (which is what one big company, Coke I think, has said they would use), though the option would need to have the same terms, including forfeiture and acceleration provisions, in order for it to be a valid proxy. Existing, but optional, standards call for using Black-Scholes or something like it and I have suggested there are issues with its applicability, but I have never said I don't accept the use of a formula.
after they have a chance to think about it, employees will insist the option compensation should appear on the books of the company at the point of issue... They will realize that if left to the point of vesting then the company has an incentive to fire them just before the options vest.
Um, how can I explain this without alarming you? GST, the fact is that whenever any option or other future benefit is subject to vesting without proration for partial satisfaction of the vesting period, i.e. "cliff vesting" where a given chunk of options vests in its entirety at a particular date and not one moment before, even partially, then the company CAN fire you just before that vesting date. Most employees understand this and most companies, I would hope, also understand that making a habit of doing this to people will likely get you sued. But whether they have or have not booked an expense on their GAAP P&L will never make a difference.
The timing of recognition of income by the employee has nothing to do with the timing of the recognition of the expense by the company. The confusion of the two is all yours.
It is not I who is confused. When did I ever say that the employee's recognition of the income had anything to do with the company's booking of the expense? I said vesting. To employees, it's not income until they exercise and the only thing exercise has to do with vesting is that the former can't happen before the latter.
BTW, it appears from your response to my post to Lizzie that you think an employer should book an expense now for a cash bonus promised for three years from now that would not be paid if the employee doesn't stick around. I concluded that this must be your thinking because you rejected my "cash equivalent" analogy as "confusion" on my part. Do you really think that's the proper treatment or is this just another case of objecting before you even know what you are objecting to? |
