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

To: Ted The Technician who wrote (251)	8/23/2002 11:26:45 AM
From: hueyone	Read Replies (1) \| Respond to of 786

One aspect of the intrinsic value method that I don't agree with is its method of valuing the option. I don't agree that only the intrinsic value of the option should be expensed - the option premium (that value that exceeds the option's intrinsic value) should also be expensed. Ted, My initial reaction to your post is that this is an idea well worth considering for valuing and expensing stock options. Perhaps Ron, Exacctint and some others will comment on your idea as well. I like your suggested improvements for the Business Week intrinsic value method quite alot. This would provide a means for recognizing the fact that an option has value at date of grant (premium), even though the exercise price and market price are the same at that point. And your idea also provides for adjustments to current market prices over the vesting period, thus dealing with an issue that a lot of people are having difficulty swallowing about fixing a Black Sholes value at date of grant. By the way, we need to be clear that we are talking about the Business Week intrinsic value method versus the FAS 123 intrinsic value method. Best, Huey

To: Ted The Technician who wrote (251)	8/23/2002 3:33:37 PM
From: rkral	Read Replies (1) \| Respond to of 786

Ted, re Business Week "intrinsic value method" .. >>I don't agree that only the intrinsic value of the option should be expensed - the option premium (that value that exceeds the option's intrinsic value) should also be expensed.<< I totally agree that the option premium should be expensed. Thanks for the wake-up call. Your post made me realize Business Week proposes expensing the intrinsic value of an NQSO. I must object to that concept. The intrinsic value is part of the financing activity of NQSOs, an idea I hope this post will make clear. One of the things that makes accounting for NQSOs difficult is that it's both an operating activity (compensation) and a financing activity (equity) IMHO. It is neither just one nor the other. I'm not sure what SI post or printed article got me started in trying to separate the operations and financing activities .. but I was reminded of it by a Grace Zaccardi post (#reply-17845505) on the Cisco thread. So what are these operations and financing activities? The easier answer is for the financing activities. The employee purchases the stock option from the company and then exercises the stock option. I don't know the accounting details, but examples must exist. The accounting for purchase and exercise of warrants should be similar. The operations activity is giving (granting) the employee the means to purchase the option. (This is where things get sticky .. and I expect to get skewered for the second time on this proposal. Hopefully, this presentation is a bit more cogent than my first.) As if NQSOs weren't already complicated enough by being both an operations and financing activity, they are further complicated by COMBINING THE TWO. Granting the employee the means to purchasing the option, and the purchase of the option, are combined in a SINGLE BARTER TRANSACTION. The company grants (gifts) the employee THE EXACT AMOUNT REQUIRED by the employee to purchase the option. Is that written into the option contract? Well, it never was in any of the options I received. Have you ever seen this viewpoint written in the WSJ, the Washington Post, any FASB publications, anywhere? I have not .. and don't understand why not. It seems obvious. Everyone now seems to believe that option grants are non-cash transactions. I disagree. I contend there are TWO CASH TRANSACTIONS that result in a NET CASH FLOW OF ZERO. The operations activity impacts the Income Statement, the financing activity impacts the Balance Statement, and maybe both impact the Cash Flow Statement but have a net zero effect. Are there problems with this viewpoint? I'm sure there are .. and I'm unfamiliar enough with accounting principles so as to be oblivious to them. One problem does come to mind. This viewpoint would seem to ultimately require taxation of the compensation the employee used to "purchase" the NQSOs. OK, everyone. You can shoot those arrows and throw those spears now. No bullets pleas. <gg> Ron P.S. This is not posted in jest.

To: Ted The Technician who wrote (251)	8/24/2002 8:29:56 PM
From: hueyone	Respond to of 786

One aspect of the intrinsic value method that I don't agree with is its method of valuing the option. I don't agree that only the intrinsic value of the option should be expensed - the option premium (that value that exceeds the option's intrinsic value) should also be expensed. Out-of-the money options have value especially when the expiration date is years in the future. Hi Ted: Your proposal, a combination of the Business Week intrinsic value plus premium value, seems to have garnered less criticisms than most of the other proposals we have discussed on this thread so far. I assume Exacctnt is mildly interested in it too since he was mildly interested in the Business Week intrinsic value proposal.<gg> Since I am not an options trader, I have some bonehead, ignorant questions to ask you. When you purchase a call option on the market and see it priced everyday on the CBOE, does the value of this call option also consist of intrinsic value plus premium value? Is this method you are proposing pretty close to simply valuing a call option over time to expiration, except that in this case we would be valuing the call option over the vesting period? Best, Huey