Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Intel Corporation (INTC) -- Ignore unavailable to you. Want to Upgrade?

To: Elmer Phud who wrote (177822)	5/6/2004 11:11:35 PM
From: ptanner	Read Replies (1) \| Respond to of 186894

re: "However I am fundamentally opposed to expensing opportunity lost unless the company would have sold the CCs instead." In effect, by making the option grants the company has 'sold' the CCs but received no cash but rather the good will of the grantee. The company has given something of value. I think the alternative of giving stock is useful here: was the stock valued at something on the company's books? No, but since there was no corresponding dollars paid for these shares there was clearly an opportunity lost (selling on open market) with a clear value (fair market value of shares). re: "I guess my point here is that obviously there is an expense associated with granting options, the question is when does that expense occur? I don't think it's at the time of the grant. It's an interesting question as to how to value the expense at the time of the exercise." I think the valuation method for the cost at exercise would be simply: market price - exercise price. There surely is a clear means by which a company can determine the appropriate amount for their taxes? Using this expense value would remove the uncertainty of the valuation method required at the time options are granted. However, it would create a huge uncertainty about future reported earnings. Take Intel for example and these numbers are off the top of my hand from perusing their 2003 Annual Report. Per the FASB option accounting methods the program was an expense for 2003 of approximately $1B. However, Intel spent far more than this (even net of option proceeds) to maintain a roughly stable #shares outstanding. This was the result of options granted many (>1 to 10?) years ago and a solid stock appreciation history. Other years it could be virtually zero is the price has stagnated for sufficiently long. If companies earnings were impacted for option cost at the time of exercise it would be prudent for them to hedge this through the purchase of options. Thus, each year's options grants could be issued with a corresponding set of purchases such that on balance the future impact to earnings would be neutral. What would this hedging cost? Well, the cost of buying calls comparable to those options granted. Which is where we are today with the proposed expensing at the time options vest. I agree it might be simpler if the options expense was done at exercise as the valuation is simple and also corresponds to the tax benefit received by the firm. However, this also would result in the company receiving value TODAY (presumably through more motivated workers) being only subsequently offset by the expense. This displacement would, IMHO, make consideration of the present company operations far more difficult to evaluate and future expectations harder to evaluate. A company also could incur potentially huge future expenses through an overly generous stock options program without present impact to the reported earnings. -PT