Amy, RE: There is a fundamental problem if the income statement theorists prevail, and it revolves around the fact that stock options are already accounted for in dilution.
That is not a fact, that is Mr. Berkeley's opinion, and one that I disagree with. Strongly.
Like many people in the anti-expensing camp, Mr.Berkeley misrepresents the case for expensing.
First of all, I'll address the argument that dilution takes care of the cost.
Let's say that Intel has 100 shares outstanding, all to outside investors. The current price is $15/share. Intel offers 100 shares to executive management. Next, take two scenarios. In the first, assume that the strike price is $5 for the management options. In the second, assume that $15 is the strike.
Rather obviously, existing shareholders are better off if the strike is $15. And yet the dilution is the same in both cases. In both cases, diluted shares outstanding increases from 100 shares to 200 shares. Existing shareholders get diluted down from 100% of Intel to 50% of Intel. And yet in one of the examples shaerholders are clearly better of than in the other example. Where should the difference be accounted for? In the income statement. The expense of awarding low strike options is higher than the expense of awarding high strike options.
But many forces are lining up against stock options. First come the accountants. Like all human endeavors, accounting has its own internal politics and fads. A current fad is to run more and more transactions through the income statement, and to put on the balance sheet more and more human judgments, particularly about future values. The profession is in the grips of its theoreticians.
First of all, Mr. Berkeley misrepresents the accounting profession. First of all, the accountants aren't against stock options any more than they are against depreciation. They just want to see them properly accounted for.
The accountants, the people that understand the financial statements the best, the people that put them together, think that stock options should be expensed. And, contrary to what is represented, the accounting profession has consistently believed this for years. It is not a "current fad", as Mr. Berkeley says it.
If an accountant tells an engineer how to design a microprocessor, that accountant should be roundly mocked. But for some reason engineers think that they can tell an accountant how to put together a financial statement. |
