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To: Oeconomicus who wrote (145326)	8/13/2002 11:38:10 AM
From: Skeeter Bug	Respond to of 164684

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? this makes sense. vesting is the key. Unearned compensation is not an expense, it is really an asset (work owed to the company) just as any prepaid expense. it isn't even unearned compensation, imho. it is nothing. not until vested. 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. not sure i agree, but i'll listen... 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). rd, this isn't true much of the time. companies OFTEN buy back shares with cash that they issued as options. sometimes billions of dollars are spent to offset options related dilutions. 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. a agree the cmplexities are enormous, given this method of accounting. 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. that is the tree. the forest is cash is used to offset options dilution ALL THE TIME! real cash. They only impact the denominator - the number of shares you divide into the present value of future cash flows. again, that focuses on the tree and neglects the forest. acounting gimmicks are not always accomplished in just a single transaction. sometimes it takes two transactions. in this case it takes two transactions. exercise options, spend company cash to offset dilution. If you know the potential/likely dilution from the option grants, you can easily adjust your estimate of the value of a share. it isn't "easy." easy is reporting the number in the headline. if the argument is that options exercises are not an employee expense, let's do away with the tax deduction. this post was rather long, rd. let me post a scenario and a question to you in the follow on post...

To: Oeconomicus who wrote (145326)	8/13/2002 11:40:50 AM
From: Skeeter Bug	Read Replies (2) \| Respond to of 164684

rd, if a company sells shares on the open market and pays an employee half the proceeds, is that an employee expense? if the company issues an option to an employee and he exercises it at twice his options price, is it an employee expense? in both examples, the exact same thing occurs. dilution is equal. employee compensation is equal. tax deductions are equal. the business impact is IDENTICAL. the income statement, an alledgeD reflection of business processes over a period of time, is FAR DIFFERENT. kirk, if a company sells shares on the open market and pays an employee half the proceeds, is that an employee expense? if the company issues an option to an employee and he exercises it at twice his options price, is it an employee expense? in both examples, the exact same thing occurs. dilution is equal. employee compensation is equal. tax deductions are equal. but the income statement is FAR DIFFERENT. why should this be so?"

To: Oeconomicus who wrote (145326)	8/13/2002 12:07:54 PM
From: GST	Read Replies (1) \| Respond to of 164684

1) Options -- no mater what their restrictions, have value the instant they are granted. That is the time to calculate the premium. There is nothing punitive about recognizing the premium value of the options granted. 2) The company does expend cash -- the cash they expend is the cash they do not collect from selling the premium in the open market. There is nothing theoretical about that. 3) Expensing options requires nothing more than a method of calculating the premium at the time they are issued. There is nothing about the future to estimate and nothing in the future to adjust. There is no issue of making adjustments ever -- the premium is the premium and it is expensed. 4) For the employee, options are compensation, not an asset. If the employee quits, nothing is owed the company -- it is not an asset for the company either.