re: Dilution Method?
I don't believe there is such a thing as a "dilution method" that is being seriously considered by any accounting or financial analysts' organizations. If the company sells shares on the open market and then turns around and uses the cash proceeds to pay the employees, everyone is agreeable to recognizing an expense on the income statements for employees as well as dilution. If the same company takes those same shares and grants them directly to the employees instead of first selling them on the open market, nearly everyone is agreeable to recognizing an expense on the income statement and dilution except Don Lloyd. In both cases shareholders suffer dilution and an expense on the income statement. Well, the logic is no different when employees are paid with stock options---shareholders suffer both dilution and should suffer an expense on the income statement. Stock options only escaped the same accounting treatment as other forms of equity compensation given to employees because of more controversy over how best to value the stock options, but the accounting and financial analyst community is largely in agreement that dilution by itself fails to properly capture the full impact of the stock option grants to employees.
There are some issues on which accounting and finance professors disagree, but the expensing of employee stock options is not one of them. Despite the pronouncements of a few renegades in our disciplines, we believe there is near unanimity of opinion among scholars in the fields of accounting and finance that the value of employee stock options should be expensed on a firm's income statement at the time they are granted.
Mr. Bodie is a professor of finance at the Boston University School of Management. Messrs. Kaplan and Merton are professors of accounting and finance, respectively, at Harvard Business School. Mr. Merton won the Nobel Prize in 1997 for his work on option pricing.
online.wsj.com
Most commentators that were users of financial statements, including individual investors, pension funds, mutual funds, creditors, and financial analysts, were generally supportive of mandatory expense recognition of all stock-based compensation.
FASB Chairman Herz, May 8, 2003
fasb.org
JMO, Huey |
