Why hasn't FASB mandated that companies expense income?
Because last time FASB made this recommendation in 1994, Senator Lieberman paid off by business lobby money, threatened to shut them down. Nevertheless, the FASB has made it extremely clear that they prefer companies use the fair value method to expense stock options on the income statement.
Because it is handled in the footnotes per FASB.
The FASB compromised and agreed to allow footnoting in the 10K in response to tremendous pressure from Washington. It is clearly not FASB's preference. Does anyone really confuse hiding earnings numbers in the footnotes of the 10K once a year with full disclosure and transparency? I certainly don't. Companies want the pro forma numbers accounting for stock option expense hidden in the footnotes of the 10K for a reason. By the time these numbers are disclosed, earnings quality from the previous year is looked as old news. The information belongs included in the income statement and should be released during the quarterly conference calls. Footnotes in the 10Qs is not good enough either. Investors deserve better disclosure.
Does a company expense shares when they issue a secondary stock offering?
No, but when they spend the proceeds from the offering for items like compensating employees, then the company shows an expense. Why should giving the shares to employees and letting the employees directly collect the money from the public instead of the company collecting the money from the public via an offering first and then paying the employees be any less of an expense in example one than it is in example two?
No, because it is handled in the dilution of shares outstanding.
Dilution only captures one component of what stock options are costing shareholders. The other component is the actual value of the stock option. Let me give you an extreme example. Let's say I am the QCOM CEO, and I give you, our QCOM employee, the option to buy one share of QCOM with a two day vesting period, and I further grant you the option at the below market price of zero dollars. In two days you exercise and sell QCOM on the same day at $30 per share. There is no recorded expense on the income statement under current accounting rules, but there is dilution. Now let's say I also decide I want to compensate our employee Uncle Frank with $30 on that same day, but instead of giving Uncle Frank an option, I decide to sell one QCOM share to the public for $30 and pay Uncle Frank with the $30 proceeds. In this case the QCOM's financial reports show both dilution and a $30 expense. There is no economic difference between the two examples. There are definitely two components for the cost to stockholders---the dilution and the value of the stock option itself. It is just that that in example one, the cost is more difficult to value at time of grant, and hence, we have let companies get away with valuing this cost as nothing. |
