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To: stockman_scott who wrote (52170)	7/18/2002 2:02:50 AM
From: hueyone	Read Replies (1) \| Respond to of 54805

It's a hidden tax - one that ultimately will be paid by Microsoft's investors. There are two sides to the hidden tax argument, with the other side being that if Black Scholes overestimates the ultimate value of the option, then instead of a hidden tax, the corporation would be getting a free tax break. Microsoft has still paid costs for the option, which it's amortized on its books - even on a stock options contract that will never be exercised by the employee. The company and its shareholders take a hit on a perk the company never really offered. Here is the flip side situation of the author's first example, but now instead of being concerned about cash flow and taxes, he has switched his focus to the accuracy of reported earnings, including the non cash stock options expense. So let's dutifully point out the other side of this argument as well----if the option ended up being worth $50 and the company only had to report $10, the company may be getting a bonus (short term at best mind you) by underreporting expenses. McCain's legislation would require companies to account for options one of two ways - the most attractive way being using the Black -Scholes method The author never pointed out what the other of the "two ways" is. Too bad he didn't elaborate. Personally, I don't think the Levin/McCain bill prescribes how the accounting for stock options is to be accomplished. From Senator Levin's site referring to the bill we see the following statement: The Levin-McCain bill would not legislate accounting standards for stock options or directly require companies to expense stock option pay, but it would require companies to treat stock options on their tax returns the exact same way they treat them on their financial statements. levin.senate.gov Analysts, meanwhile, point out that stock-option accounting could decimate the tech industry. First, I haven't seen any proposals to outlaw stock options, and second, I suspect misleading accounting is a bigger threat to the industry than more accurate accounting is. Call me a simpleton, but what's wrong with companies recording the full cost of offering the option - in Microsoft's case, $50 it reports to the IRS -- once the options contact is exercised? Well, there is a downside to everything. Here the downside is the potential for all the options granted over multiple years to all be exercised in one single year, thus hammering reported earnings for that particular year. An entire year's reported earnings could easily be wiped out. The advantage of Black Scholes is two fold, one, that it alerts shareholders that something is up at time of grant, instead of conceivably ten years later, and two, it tends to smooth out the impact of options grants on earnings. Call me a simpleton, but what is wrong with the model that JS and I were bantering about? It has the advantages of Black Scholes--- shareholder alert and smoothed out impact on earnings, but ultimately reconciles the Black Scholes estimates to actual value at time of exercise or expiration. Best, Huey P.S. The article indicates that an initial Black Scholes expense estimate is charged over the life of the option. I thought is was charged over the vesting period of the option, but I may have been mistaken.