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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Bob Rudd who wrote (14048)	2/28/2002 2:35:48 PM
From: jeffbas	Read Replies (3) \| Respond to of 78672

Bob and Don, your posts are worth commenting on (based on my long ago accounting training). Options should be counted as compensation and it easy to account for. The reason they should is easy to see with a simple example. Let's say a CEO chooses to take all options instead of cash salary - he sure isn't being paid nothing. The accounting is simple. At date of issuance, a liability is charged to the compensation account for the Black-Scholes value of the option based on price of stock, exercise price and duration. This liability account (and related partial tax liability offset) constantly changes as the parameters change. When the option expires, the liability account with respect to the expiring option is credited and the cash compensation account is debited (with little effect on the income statement at that moment with respect to the expiring option). On the other hand, I believe that these articles such as you posted border on hysterical, to make some academic's point. If you had a stable stock market, I suspect (but do not know) the option expense for most large, profitable companies would not be a material percent of earnings. Furthermore, if this had been in effect, earnings reported right now are severely understated - because the large option liability at the stock market peak would have been shrinking like crazy, enhancing reported earnings. Since the option value compensation at exercise eventually hits the income statement, this is more a matter of properly allocating expense to time periods than avoiding it altogether. In my opinion, the values of options should either be directly accounted for or included in a footnote, but not ignored. I tend to favor the latter as I am not nuts about the idea of making reported earnings fly all over the place with the stock market.

To: Bob Rudd who wrote (14048)	3/1/2002 5:56:10 PM
From: Paul Senior	Read Replies (1) \| Respond to of 78672

Regarding the options discussion, here's an article which describes how cash flow growth might be affected by stock-options tax benefits: news.morningstar.com When discussing how earnings can be (or are) manipulated by management to deliver e.p.s. numbers, there's often the suggestion made that cash flows (cash flow per share) might be a better representation of company performance or be a better metric to use by analysts in determining the value of a company. The above article implies that cash flows may have to be looked at closely too though.