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To: GST who wrote (144512)	8/1/2002 12:02:00 PM
From: Oeconomicus	Read Replies (1) \| Respond to of 164684

GST & HJ, the sticky part of booking the option expense at issuance is that you are creating a whole new theoretical, non-cash expense that depends on a whole new set of assumptions in a formula designed for tradeable options to arrive at a valuation that can change dramatically long before any of the options can be exercised (they are, of course, not tradeable). Will companies get to book gains if their stock falls and the options become less valuable? If not, you are not really trying to represent the economic value of the options as compensation, but rather just trying to penalize companies that grant options by forcing them to report lower earnings. OTOH, if you do allow for revaluation of the options and the associated expense over time, you have only created a new mechanism for smoothing reported earnings with non-cash gains and losses. The result will be even greater confusion among investors as to the real profit from operations. Doesn't it make more sense to take the expense when the employee cashes in his option? That's the only point in time where you can pin a real number on the expense. It's also the point where the employee and employer owe taxes on it as compensation (assuming it's not an ISO). And it's most likely to occur when the stock and, presumably, earnings are high. BTW, if you take the expense (a debit to retained earnings), whether you do it now or later, what is the offsetting credit? We know it's not cash if the employee exercises and sells in the market. Is there some other asset you can write down? I don't see one. Is there a liability created? No. So what do you do? Well, all that's left is to credit an equity account - paid-in capital perhaps. What have you accomplished? All you've done is shift balances between two equity accounts. The only thing that really changes is book value per share and future per share eanrings and cash flow (because more shares are now outstanding) and that happens anyway, even with current option accounting. Regards, Bob PS: I would not be opposed to my alternate treatment, but I don't think what's being batted about now is a good idea.