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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: rkral who wrote (228)	8/19/2002 9:27:12 AM
From: hueyone	Read Replies (1) \| Respond to of 786

Hi Ron: I was a little surprised when I read that Business Week article, but I knew you would clarify things if I/they got it wrong. I have never paid much attention to the intrinsic value method described by FAS 123 because I knew that it was not doing any good.<gg> Anyway, I finally just now read an actual description of FAS 123 at the FASB website: fasb.org So correct me if I am wrong, but let me restate my understanding of what is going on: Companies are calculating the "intrinsic value" of the options at date of grant using a limited definition of "intrinsic value" described as the difference between market price and exercise price at date of grant. This definition almost always results in a zero dollars value when the options are issued. Companies use this limited "intrinsic value" definition to justify expensing nothing on the income statements. If companies choose this limited "intrinsic value" method for valuing stock options on the income statement, then FASB also requires that companies disclose the impact on earnings from using the fair value method value for expensing options in the footnotes in the 10ks. The footnotes of the 10ks is where we generally find the pro forma earnings using Black Scholes estimates for the fair value of the options. FASB clearly prefers that companies choose the "fair value" method to expense stock options on the income statement, but almost nobody does---that is up until the last few weeks or so when companies have started volunteering to do so. Best, Huey