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To: Mary Cluney who wrote (151368)	12/6/2001 4:47:02 PM
From: Elmer	Read Replies (1) \| Respond to of 186894

I don't see that I have lost $100. I only see that I have made $100 less. And my pantry door has been fixed. What am I missing? Good one Mary! A question for you. You have 100 beans you bought for $10 each. You grant an option to buy your 100 beans at $10 each, exercisable in one year but not before. Next year you buy 100 more beans at $20 each and grant options to buy those at $20 each exercisable in one year but not before. At the same time someone exercises the option you granted last year and buys 100 beans at $10 each. I say they bought the old beans and it is a push. Others seem to be claiming they bought the new beans and you just lost $10 each. What do you think? EP

To: Mary Cluney who wrote (151368)	12/6/2001 4:56:28 PM
From: GVTucker	Respond to of 186894

Mary, RE: I am truly embarrassed. I don't really understand this. No, Mary, on the contrary, you've got it. By granting an option to fix your pantry door, you incurred a cost. And that is why you made $100 less. The issue here isn't how much money you truly made (you already know that), it is how that is reflected in GAAP accounting. According to GAAP, you DIDN'T make $100 less. You made the full grand and your pantry door was fixed for free. You know that isn't accurate. You actually made $900. The difference is that you know that you made $100 less because you granted an option to fix your pantry door. Rather than embarrassing yourself, you've clarified things. Thanks.

To: Mary Cluney who wrote (151368)	12/6/2001 5:55:40 PM
From: Saturn V	Respond to of 186894

Mary, Ref < Stock Option Accounting > you are absolutely right. You have not lost any money from the income point of view. However you have lost the opportunity to have made more money. You could have sold the option on the open market, for the $2 ( or whatever value is attached to the option). Thus by granting the option your income is $2 less per bean, than what it would have been otherwise. Exactly the same process happens for the company options. The company does not lose any money, just that the proceeds from the sale of the stock are deferred. The employee stock option has a market value, but no one is willing to put a number on it. One reason is that if a market value is assigned to it, IRS will get into the act, and will treat it as employee compensation on the date of the grant. Thus the employee will have to pay taxes on the date of the grant, even though the employee make get no benefit if the stock does not increase or if the option expires due to termination. Employees do not like that and the stock option instead of being an incentive, becomes a disincentive.