Ahh, so that's what you were getting at. Hardly on-topic though - how was I to know?
How is someone writing puts on their own stock relevant in a discussion of employee options? Employee options are calls and, because the grantor (writer) of the option is the issuer of the underlying security, they are covered calls. The only similarity with what you're now talking about is that some kind of option is involved*.
Now, since I don't know the accounting rules that might apply to your red herring of a situation, I'll just guess and leave it to you to prove me wrong. I assume, since you raised it as a challenge, that you do know the answer and have credible source information to back up whatever you claim, so proving me wrong should take little of your time and effort. Here goes:
Microsoft writes puts on its own stock, taking in cash from the option premium. They have so far only created a short position in a security, so nothing hits the P&L. Eventually, however, the option must either expire worthless, be bought back, or be exercised. If we were talking taxes, this would be easy and there are some situations where GAAP and tax are similar, so I'll start there.
If exercised, the premium received reduces the basis of the shares purchased upon exercise, so it might make sense to do the same for GAAP - stock is purchased into treasury at a net cost equal to the exercise price less the premium received. No P&L impact. Close?
If bought back, you've closed out a position in a security, realizing a gain or a loss. This would certainly be a taxable gain or loss and I'd think it would also hit the P&L, but there's a hitch which I'll get to in a sec.
If expired, you've obviously realized a gain, just as if you had bought it back for a gain. Same apparent answer and same open question.
The question has to do with the fact that accounting rules do not generally allow a company to report P&L gains and losses from buying and selling its own stock into and out of treasury.
In the case of calls, one is essentially selling/issuing an equity security, albeit one that expires, and the issuance of the underlying security would certainly be a capital transaction, not hitting the P&L. The premium received for the call would be added to paid-in capital just as the payment of the exercise price would be. That is, in fact, how FAS-123 treats it - the premium received being, in the case of employee options, the value of the work received measured theoretically using Black-Scholes. If the premium received were cash, then nothing would ever hit the P&L as a result of issuing call options on your own stock. However, under FAS-123, the premium comes in the form of work. If the company sold calls for cash and then used the cash to pay workers, then the latter half of that series of transactions would hit the P&L, though the first half would not. FAS-123 effectively results in just that treatment. The only issues with it, for me anyway, are the two I noted in an earlier post tonight.
Now, back to your put question. If a short put position has all the downside of a long equity position, it is similar to buying treasury stock and, upon exercise, actually results in such a purchase as I said above. And as we now know, a company does not run treasury stock gains or losses through the P&L. Why would we run a gain or loss through the P&L just because the option was not exercised, but rather expired or was repurchased?
Well, the underlying security is still the company's own stock, but writing a put is more akin to a debt than an equity issuance. You are issuing a promise to pay cash to the holder - the very essence of a debt. Since gains and losses on extinguishment of debt do hit the P&L, then it might make sense for gains and losses on expiration or early repurchase of written puts to also hit the P&L. But like I said, I don't know what accounting rules might address this situation, so that's just a guess.
So, what's the answer and what does put writing have to do with employee options?
* Actually there is another similarity. Do you know what it is? |
