Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (60284)	7/12/2002 8:39:41 PM
From: hueyone	Read Replies (1) \| Respond to of 77399

BTW remember on the sebl thread you were asked how to handle Ellison's 10 year old expiring options as an expense, given the fact that this was compensation for 10 years of prior work. Did you ever come up with a solution? I am in favor of expensing the Black Scholes estimates on the income statement, and then as these same options are later either exercised or expire worthless, adjusting, or truing up if you will, the actual options compensation expense. The net effect over time will be that the actual options compensation expense , market price minus exercise price on the day of exercise, will be reflected in earnings. The advantage of using the Black Scholes estimates for starters, however, is that corporations will be forced to report some options expense against income in the years they grant them, thus giving shareholders a more representative picture of earnings--- even though this figure will later have to be adjusted to reflect actual results. You may have to refresh my memory more regarding the Larry Ellison question, but I believe I had noted that he had exercised options worth 706 million in 2001 and you had said that this reflected 10 years work. I am not sure how many millions of dollars worth of options he had exercised in the previous years, but let's assume strictly for the sake of discussion purposes that the 706 million he exercised in 2001 were his main exercise of options over a ten year period. My understanding from Rkal is that the Black Scholes estimates pro rate the estimated value for options grants over the vesting period of the options, so if Larry was exercising options that he received in years 1992, 1993 and 1994, for example, the estimated value of the 1992 options under the proposed method above would have been picked up and expensed on tax returns from 1992 to 1996, assuming a five year vesting period. The estimated value of the options granted during 1993 would be expensed over 1993 to 1997 and so on. Now if the actual compensation value of Larry's stock option exercises in 2001 were 200M over and above what was previously charged against income using the Black Scholes method in the early nineties, another 200M in expenses would have to be recognized against income in 2001. On the other hand, if all those old options were now expiring worthless, the Black Scholes value of the options that had been previously written off would have to be added back to income on the year of expiration. You might note that this method could potentially cause some serious fluctuations in earnings and criticize the method for that reason. However, it is my belief that if options were expensed, they would be granted more judiciously in the first place, and there would not likely be the large impacts on earnings that applying this method retroactively over the last ten years might show. In addition, the huge bubble followed by a crash causes the original Black Scholes estimates to need more truing up than we should expect on average during most ten year periods going forward. Here is a good post by JS where he talks about how to make earnings, cash flow, paid in capital, etcetera all come out hunky dory under a scenario of expensing stock options starting with estimated values. Message 17628600 Best, Huey