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To: GST who wrote (145310)	8/13/2002 9:19:53 AM
From: Oeconomicus	Read Replies (3) \| Respond to of 164684

The more-or-less correct approach ... So, which is it? ;-) BTW, why do you have so much trouble accepting the fact that options are not EARNED compensation at the date of grant, but only upon vesting? Unearned compensation is not an expense, it is really an asset (work owed to the company) just as any prepaid expense. Calculate your theoretical option value at grant if you want, or do it at vesting, but booking the expense at grant is punitive and without basis in reason. In any case, it doesn't matter for two reasons. First, it is still only a theoretical expense- i.e. it is an estimate of an expense that will never require the company to expend cash (beyond a little bit of payroll taxes). I don't necessarily have an issue with booking estimated expenses where they can be reasonably and consistently estimated - depreciation is just such an expense - and where there is a mechanism for adjusting from erroneous (in hindsight) estimates to actual expense. Depreciation has a built-in, automatic adjustment feature; either you keep using the asset to generate income after it is fully depreciated, resulting in higher reported income, or you book a gain or loss on disposal of the asset, correcting for too much or too little depreciation. Your option expense, at least as you seem to favor it, allows no adjustment from "estimated" to "actual" expense. Second, contrary to your earlier statement, GAAP earnings are no "baseline for valuation" - free cash flow is what really matters. And options have absolutely no impact on the discounted cash flows of the business. They only impact the denominator - the number of shares you divide into the present value of future cash flows. If you know the potential/likely dilution from the option grants, you can easily adjust your estimate of the value of a share.