Slashdot Mirror
The Coming Expensing of Employee Stock Options
An anonymous reader writes "This accounting change will reverberate loudly throughout geekdom.
"Users of financial statements...expressed to the FASB their concerns that (the current handling of stock options) results in financial statements that do not faithfully represent the economic transactions affecting the issuer, namely, the receipt and consumption of employee services in exchange for equity instruments. Financial statements that do not faithfully represent those economic transactions can distort the issuer's reported financial condition and results of operations, which can lead to the inappropriate allocation of resources in the capital markets." Taken from FASB Statement of Financial Accounting Standards No. 123 (Dec 2004). A
FAQ has been published as well." Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
That's so 1998, man.
Actually, with the tech implosion back in 2001, this affects technology companies less than we would expect. It was put in place to catch companies that were writing off massive amounts of tax through the issuance of options. However, with fewer companies doling them out, and employees less enthused about receiving them, this new regulation affects the old bricks and mortar companies more than those in the tech sector.
Am I the only one who has no idea what the hell that summary just said?
Can someone please translate it into plain english for those of us who either A) have never had stock options or B) are just too dumb (me perhaps) to decipher what was said?
old news? "Oh god we can't inflate our earnings anymore." It'll be ok guys, just calm down with the options a bit...
"There is no real right or wrong, just what the majority accepts at the time."
All Slashdotters who post before 10 a.m. get non-qualified stock options. Get a piece of blank paper, write a number on it, and there you go.
Seems like it would affect investors that read financial statements more than geeks.
The article seems to imply that all companies that use stock options do so to basically lie to thier investors, and once they must account for them in a more obvious way, geeks will be paid less.
Pretty blatent bias, when the article notes 750 companies are already in voluntary compliance with the new rules.
I've had enough abrasive sigs. Kittens are cute and fuzzy.
Hell, I'd just like to be paid overtime.
You have two hands and one brain, so always code twice as much as you think!
Still, we now have less incentive to stay at the same place since we have a much smaller stake in the company. This can be a good thing or a bad thing.
Yes. I'll think about this issue when i stare at all the worthless options i got from companies that I worked for that are now no longer.
Today when i negotiate w/ an employer i try to get a better deal for here and now rather than becoming a shareholder of the company. by the time you figure dilution and taxes, the company might as well just take everyone out for dinner and a movie and call it even.
Sanity is the trademark of a weak mind. -- Mark Harrold
FASB is located in the USA.
In the USA, it's Month/Day/Year.
Of course, you knew that, you're just trying to be funny (and failing miserably.)
> this will be a huge change in how tech companies work.
Yeah, they won't be able to pay their slaves with a chance to sit at the roulette wheel once per job.
Sheesh, evil *and* a jerk. -- Jade
If you're good enough, it'll work.
But will it really change the packages on offer? I guess that everyone from CEO down wants to retain stock options. They will just look more expensive to investers i.e. they will get a better view of a firm's financial behavior.
The relevance to slashdotters, is of course that tech companies have had the growth profile and preferred this "cool" way of rewarding directors and staff.
-- In Sri Lanka they aren't worrying about their STOCK OPTIONS being underwater. --
Jerry
http://www.syslog.org/
This is important because companies that do not report this method of compensation (stock options) have inflated reported financials because options were not properly accounted for on the statements. So, what does that mean? Analysts and investors did not have full disclosure as to how future stock options being exercised would really affect the company in the long (or sometimes short) term.
This will not only change the way that tech companies operate and report, but other huge publically traded corporations. When a company lures a big name CEO/CFO, and promises hundreds of thousands or millions of stock options to be exercised at a later date, that dillution of equity (even though in the future) was not being properly declared on the financial statements. Now that the FASB (financial account standards board) has made this recommendation/ruling, companies must comply.
This is what one might call "truth in financial reporting", and I'm very glad to see that this has passed. This has been a very long existing loophole that large companies have used to the detriment of our investment community, and the general public (i.e. our domestic economy) as a whole. Don't be blindsided by the rhetoric that only "tech companies" will be affected by this -- there were a LOT of big corporate powers that did not want to see FASB rule, and whenever you have that, you always have to wonder what their reasons are. I encourage you to read the FAQ, and read any news articles you can regarding this ruling. I think you'll agree this is a very positive thing.
How about "Yes, this is a re-post from last week's news?"
A stock option is a contract that lets you buy a share of stock after some point in the future at a specified price. Example, a Google employee might get paid an option to purchase Google at $50 / share exactly three years from today.
.... very misleading.
Three years later, when Google sells for $100 / share and you cash in your option, Google will pay the difference b/t the share price and the option price (in this example $50). This is an expense which is tax deductible. Such a deduction creates a GAIN. The gain can be classified as income from continueing operations
Also misleading is that a company can employ a bunch of people without incurring the usual payroll costs associated with employing people. Therefore, sales should rise, but costs of goods sold does not rise. This creates a misleading impression of profitability. However, the market will probably catch this and lower the value of the stock. And this can happen long before your option has reached its maturity.
YOU DO NOT HAVE TO ACCEPT OPTIONS IN LIEU OF CASH. This is a decision each employee makes. You can, in theory, accept a lower pay of pure cash instead of a "higher" pay composed of stock options.
Going back to the Google example, if three years from now Google traded at or below $50 / share, your option would be worthless and you would have nothing. That is why you might want to consider getting paid in cash VS. getting paid in options.
Since when is it a crime not to be fluent in business. Oh yeah, 2000.....
[ ] don't get stock options
[ ] don't work for a listed corporation
[ ] don't work
[ ] am not human
YOU INSENSITIVE CLOD!
When I am king, you will be first against the wall.
[Stock options result] in financial statements that do not faithfully represent the economic transactions affecting the issuer, namely, the receipt and consumption of employee services in exchange for equity instruments...
Stock options amount to the company giving money to employees...
Nah, not funny. Bitter and cynical.
You clowns have to realise some day how totally screwed up a nn/nn/nn date format is when there is no universally accepted positional meaning.
When Slashdot converts to ISO standard, I'll be happy.
I read the FAQ link, The first few paragraphs essentially said, work for us, and we will pay you in lottery tickets.
Why Politics? This is not a political issue.
Yay! Microsoft can no longer grow like a pyramid scheme, w00t!
Get a job at microsoft, get all these options Microsoft gets bigger cause they hired you, & their stock goes up. Microsoft hires more people using extra stock money...give out options...w00t pyramid scheme!
I guess Politics is becoming the new catch all, after YRO.
"As God is my witness, I thought turkeys could fly." A. Carlson
Working for two start-up companies (now defunct). I had stock options - now worthless. What these options meant to the technical staff? A way (good and bad) for the management staff to motivate the already overworked technical person. That is not to say that options used for motivation were bad. Having stock options did help form a comradely in the technical organization. But now looking back - after all the long hours working hard to make the new company successful with the thought in the back of your mind that you would receive a reward in the end - is a very poor way to motivate yourself.
Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
It was mentioned in Slasdot on 12/17/04
Couple of corrections to the statements already made:
1. It is not really possible to properly account for option grants vis a vis cash vaule because: a. options are a hedge AND b. options may not be cashed out (employee leaves/dies, stock is underwater)
2. If 1 is true, then you get an equally distorted view AFTER this decision as before
The argument that investors will have a better idea of the business as a result of this is not really accurate, either. After all, institutional investors already follow option grants, so this isn't hidden. If you don't follow this kind of data for any company you invest in, you're simply willfully ignorant.
"... but you can love completely without complete understanding." - Norman Maclean, "A River Runs Through It"
Yeah, ISO finally defines Monday as the first day of the week. If Sunday is part of the *weekend*, how could it ever be the *first* day of the week?
Nice catch on the inherent logical fallacies in the parent post, and the nod towards the rules making the market more efficient by increasing the amount of signal reflected in the market price.
In the past, startup tech companies have relied on stock options as an affordable way of attracting qualified employees. With option expensing these startup's ledgers will be so ugly that they will no longer be able to attract venture capital. So startups will be forced to either
1. Not offer options, and have a harder time attracting the high powered engineers.
2. Offer options but run with no operating cash because they can't get venture capital.
3. (The most likely) Simply never start the company in the first place.
The bottom line for us techies should be fewer startups and fewer jobs.
Everyone keeps talking about how the payoff from stock options are random. This is not the case. Stock options pay off when the company does well, they do not pay off if the company does poorly.
The whole point of stock option is to align the interests of the employee with the interests of the owners (shareholders). This is most important with upper management because the decisions they make affect the value of the company more heavily then the decisions lower down in the company.
The Statement permits entities to use any option-pricing model that meets the fair value objective in the Statement; however, the Baord believes that lattice models, including the binomial option-pricing model, are capable of more fully reflecting certain characteristics of employee share options.
If you do not know what lattice models and binomial option-pricing models are and how they work, then do you really understand what this change represents? Mandelbrot's new book The (Mis)behavior of Markets has some interesting arguments that these models are poor representations of value based on misunderstandings of how markets determine prices. This is somewhat damning, especially if the problem this is supposed to solve is corporate executives feathering their nests to extremes which is still continuing and increasing.
You forgot:
4. Start a company that's profitable without needing to lie to investors.
The bottom line is that there should be fewer failed startups.
This change will make stock options for anyone except the top most layers of management a thing of the past. You see, stock options are already expensed. The main measure of the value of a company is the Earnings Per Share, or EPS. This is the ratio of the total earnings of the company divided by the number of outstanding shares. Increase the number of shares, and what happens? The EPS drops. But now, if you issue stock options, you get hit twice. You get hit once by falling EPS due to the increased number of shares, and a second time as you have to decrease your earnings by an amount equal to the value of the stock option grant.
The problem with stock options were the immediate grants. The idea behind stock options was to give the people in the company- not just the upper level management, but everyone- a stake in the company. A stake in the long term prospects of the growth- especially if the options you're granted now can't be exercised for five years. All of a sudden not only are you less likely to quit (and lose those options!), you're more concerned about where the company will be five years from now.
The problem is with the CEOs getting multimillion dollar stock grants, on pennies on the dollar, effective immediately. This encourages to pump up next quarter's numbers by any means, hook or crook, so they can dump their stock. And to heck with where the company will be a year, let alone five years from now.
But hey- given a chance to throw the baby out but keep the bathwater, would we pass up the chance?
Brian
Yes; the data is from 12/16/04, but this will be a huge change in how tech companies work.
Not without another period of insanity like the '90s.
As many other Slashdotter have pointed out, stock options don't mean much unless you work for a stable organization (like Cisco, which is the king of employee stock-option grants AFAICT). And of course if those options have a chance in hell of being above water at maturity or later.
The change is actually good news for shareholders, and will force companies to act responsibly before diluting their owners' equity. There's no need anymore to tolerate any of the "license to print money" crap from the past decade.
The only bone I have to pick is that, IIRC, someone out there (FASB? SEC? your congresscritter?) is thinking of abandoning the Black-Scholes method of options pricing, which is the standard method (look it up), but only in the case of executive or employee compensation.
That sounds fishy to me: IMO an option is an option is an option, and should be evaluated as such. Any other finance/econ dilletantes out there care to comment?
--- The American Way of Life is not a birthright. Hell, it's not even sustainable.
Speaking from personal experience, options are great when the stock market is on a tear and an insult when the markets are going down. For the past four years, I'd take salary and a steady pay check over options any day. And the sickening thing is that although options are touted as a way to give everyone at a company a share in the company, it's by no means an equal share. The disgusting disparities in pay are echoed even more ridiculously in terms of options.
The problem that I have with all this is the word "expensing". An expense is something that HAS cost you money. A liability is something that WILL cost you money. These don't cost the company one cent until they're cashed in, and might not ever if they're given out at the top of a bubble. They're liabilities, dammit!
#naabhaprzrag, #sverubfr-000, #agi-fcbafberq, negvpyr[pynff*=' negvpyr-ary-'] { qvfcynl: abar !vzcbegnag; }
I have stock options that have vested that I can't exersize because the bottom fell out (i.e. lets say I got options at $20, and now the stock is selling for $10).
The last stock options that were issued by my company was several years ago. Since then they have been issueing cash bonuses instead - which those of us holding worthless options welcomed.
(I am hoping the stock market will climb again so I can exersize the options I am holding, but I doubt it will go high enough for those options there were given in recent years - when the stock price was inflated. There is a time limit on how long you can hold them once they vest - so having stock options is a big gamble for you)
Lodragan Draoidh
The more you explain it, the more I don't understand it. - Mark Twain
This http://finance.yahoo.com/q/bc?t=5y&s=ORCL&l=on&z=l &q=l&c=ca%2Cbmc%2Cmsft shows that companies heavily into issuing stock opttions have gone down 50% over the last 5 years.
The 'the economy is against us' in their financial statements does not stand.
So if there is no universally accepted method, how could one use be wrong and another right? How in the future is someone going to suddenly realize the method they use is screwed up and what is going to trigger that sudden thought? Both methods represent the date, neither is better then the other. 99.99% of the people I deal with on a daily basis use the same method I do, I am not switching until the majority swings the other way. There is a long way to go for that and if it does happen, It will not be because I suddenly realized the previous method was stupid.
Similarly for corporations. If payment A (cash) looks like an expense on the balance sheet and payment B (options) doesn't (yet), then which one will they pick?
I guess one of the other questions is, how does the company handle options when due? If they just issue new shares, they dilute existing shareholder value - which those shareholders might want to know about. If they buy back shares the company incurrs an expense which should be noted. Issuing shares is the least painful method to the bottom line, if the excutives are no longer majority shareholders, and the existing shareholders have little clout.
The Accounting profession (IANAA) is generally conservative. Income should not be recorded until it's earned, expenses should be recorded as soon as you're contractually obligated to pay. (I.e., you can't back out unilaterally). It's rules probably demand that shares be treated as costs at current market value - since there is no easy way to predict future share prices. And once the "promise" (option) is there, it has to be accounted for in case it IS exercised.
Presumably, if the option is not exercised, then the liability dissappears as a nice bonus for an ailing company (and another employee ripped off by the system).
Presumably, now, too, the employee really hasn't earned anything until they either exercise the option for a profit or sell the option (if allowed!). So they shouldn'tpay taxes until the option is exercised.
Watch for the IRS someday soon to assign value to options and tax them as current income. After all, you CAN buy futures options on some listed stocks (and commodities) so there is a value there. Maybe they'll make you restate all previous years' income tax once the value of the option is determined on exercising it. After all, they are the government.
Many companies allow you to receive cash instead of company stock. That is called a Stock Appreciation Right (SAR). Usually this information is contained in the annual report.
Oh ye of limited thought! Clearly there are only two possible sensible methods: left to right, or right to left. Putting the middle bit first is just plain wrong.
But never mind this, I'm willing to give up my native date ordering to adopt the ISO standard. This should make you happy as I don't get to win either. We would meet at a neutral point, so to speak, where neither the European nor the American format win, though the Japanese might feel a bit smug.
Case 3: Employee with stock option to buy shares at $200 a share. Employee does nothing with stock option as it will cause them to loose money.
Stock options are issued in advance before they may be redeemed. Also, they may not always be redeemed as in the above case (unless you are in an idiot). If anything, the options should be listed under a "Risk" category, not under expenses as they may or may not be redeemed.
Fly me to the moon Let me sing among those stars Let me see what spring is like On jupiter and mars
If the company buys new shares to give to the employees, it is an expense, and as far as I know, has always been treated that way.
Stock options from newly printed stock are a payment from the shareholders (who's share of the company is diluted) to the employees. The company is just an intermediary, and does not lose any money (outside of printing costs). It's no different than if all of the stockholders decided to give 10% of their stock to someone, the company doesn't lose anything. Saying that they do lose something seems like lying about revenue.
This isn't ripping off stockholders as long as they state that they printed more shares.
Actually, forget what I said and just read the second bulleted paragraph here. They state the issue much more elequently than I can. "Unlike other forms of compensation, stock options impose no financial drain on a company."
Or, from a less biased source: "Every other expense decreases the net worth of the corporation, whereas stock options, when exercised, actually increase it."
Just so someone tells the other side of the story. :)
Yndrd1984
Options also don't put food on the table, pay for heat and electricity or put gas in my car to get to the job that issued the options instead of cash.
Until the day comes where I can go to the grocery store and pay with stock options instead of cash they will continue to be worthless.
Why is the tax deduction a scam? A share has real value. If you give an employee a share worth $100 in exchange for $50 (as would happen when an option was exercised), you are lowering the value of shares held by others and in effect giving the employee $50. The company should have a tax deduction, exactly as if they paid cash to the employee.
Basically reporting will be better, but it will mean a big change in the tech industry for talent. If the company's response to this is to stop issuing stock options then they need another way to incentivize (is that even a word?) their employees. If they decide not to then they will be basically creating a salary cut of some sort.
In other words give me options or give me money, but if it's just salary and the salary only grows by 2-3%/yr then I will change jobs more often than before since that will be the only way to increase my income.
"Where quality is like a dead stinking rat - you just can't miss it."
I've got a corporation. I'll just issue more options on shares, and give them to my employees instead of cash - up to 25% their salaries, a great value for them, at the rate I'm offering. I'll convert 25% of my biggest expense, salaries, from cash I have to get from customers, into options I can whip up in an email, and keep that 25% as profit. Until they exercise those options (I dunno, after the IPO, I guess), that profit is all mine. With every other corporation printing up money in the form of these expensable options, I'd better spend that cash while it's still worth something, because we're going to inflate the value of the assets that cash must represent beyond belief. Boy, this is so much better than the "old economy", where I had to laboriously note in my corporate reports that I had an "outstanding liability" on issued derivatives of my equity. How could anyone foolish enough to invest in my company ever understand such arcane accounting lingo? Instead, the cracks in the monetary system we're creating will be impossible to ignore
--
make install -not war
Since it is very typical with such options that the employee cannot sell or exercise the option for several years, the model isn't ideal. But it's better than pure guesswork at the value.
that's kind of the point. This rule, just like every other rule made under the Bush administration, is about screwing the little guy at the expense of (a) large corporations, (b) financial institutions, or (c) extremely wealthy individuals. If you go to work for a very early-stage company, and you are one of the first, say, 20 employees, you are really taking a risk- becuase the odds are that your tiny company just won't be around in 5 years. If you have a two kids, a mortgage and a car payment, how do you think it would impact your life if the company you work for suddenly couldn't make payroll? That's right, even with six months' savings in the bank (which you don't have) and a $10k limit on your gold card (of which you've already used $7k), you're going to be scrambling to find work. If I'm going to risk my livelihood for a dream, I expect to be rewarded handsomely.
But a small company can't afford to pay you more in cash than a company like Cisco or Oracle, so that small company needed a way to reward quality employees for hard work and loyalty. That's what stock option grants at startups were about- the company rewards its employees for taking a risk, but is legally still solvent. And yes- it does revolve around luck, and when you got in- becuase if you join a company as the 100th employee or the 1,000th employee, it should be clear that you're making a much safer bet than the 10th employee was when she joined. High risk, high reward.
Under the new rules, there's no easy way to reward early-stage employees for their risk-taking except to pay them more cash. And until the company is doing well financially, an employer can't afford to do that. Catch-22.
This rule change will make no difference to CEOs of Fortune 500 companies, becuase they'll still get paid $lots. It won't change the risk involved for institutional investing, so the i-bankers and vc's will still have the same issues to worry about. If anything, it will make the i-banker's job easier, becuase there is one less number they have to add to the financial statements if the reporting company is putting it in there for them already. It will slow down the progress of startup companies with disruptive technologies, becuase it will be harder for them to motivate quality people to leave their current employers. It's a minor accounting change for a Fortune-500 company, and death knell for the way that startups recruit talent... which is probably music to the ears of those F500 companies who can now pay their regular employees LESS because they don't have to worry about as much competition for their talent.
It sounds like you were the beneficiary (in spades) of the old system- you of all people should recognize the upside! The only real impact this rule change will have is to make it more difficult for very early stage startups to attract and retain quality employees- which is great for everyone, except entrepreneurs, their early-stage startup companies, and their employees...
Humpty Dumpty was pushed.
FASB has been essentially accredited by the US Government, courtesty of Messrs Sarbanes and Oxley. As well as tossing a lot of money wasting BS at the rest of us. Sarbanes-Oxley- "A Jobs Program for Those Poor Big 3 Consulting Firms Who Pay our PAC Money !"
Kind of like the Federal Reserve Bank is accredited by the US Gummint, but isn't part of it.
Amen. Finance stories on slashdot just make me cringe sometimes. On the other hand, they help me understand how things like the .com boom were able to happen.
Its funny, you have a very good point. But so does the parent post to yours.
It will be harder to start a company. I dont think I agree that there will be fewer failed startups, however. I dont see the connection, please explain.
emt 377 emt 4
I think your post shows a misunderstanding of how tax brackets work. There is no benefit to "dropping down to a lower tax bracket." It sounds like you assume that if you are just into a higher bracket that you pay that rate on all your income. This is not true. You would pay that rate on just the amount of income that puts you over the limit into that bracket.
For example, $70k is in the 25% bracket. $80k would be in the 28% bracket. One would only pay 28% on that last $10k and then pay 25% on about $10k and then pay 15% on about $40k and then nothing below that.
Using stock losses to increase deductions and save taxes is a good idea that may work for some people. But it's not because it drops them down to a lower tax bracket.
There is actually also another side to this
story. I was working as a subcontractor to a
large defense contractor (who shall remain
unnamed). In the five years that I worked
on that contract, my employer (who the defense
contractor paid for my services) changed four
times. One of the larger of my "new"
employers offered me stock options after being
there for 3 months -- the catch was that I had
to exercise those options within 60 days. The
strike price was, as I remember, about $25 per
share. I declined to exercise those options.
Very good thing that I did, too, because within
6 weeks of the stock option offer, the company
declared bankrupty and the stock price went to
$00.25 per share.
Sometimes it isn't only the outside investors
that get screwed over by corporate management.
I'm thinking of all those employees of Enron
and of WorldCom that got rousing pep talks from
their CEOs just before their stock tanked.
For the lowly employee, stock options are a huge mistake anyway. For one thing, your salary is already tied up in the company you are working in.
What happens if the company goes bust? You already lose your salary, so do you want to lose your options as well?
Another thing, if you do not sell your options right away, they will devalue, or even go to nothing if the company declares bankrupcy.
Stock options can be beneficial for CEO's who run the company into the ground after they make their millions, but in the end there is no good reason to not cash in your options. You should invest in many companies instead of just putting all of your eggs in one basket.
So what does this article change for the common man? Nothing, except maybe there will be less stock options out there. IMO, this is for the best anyway for lowly wage earners.
Without the options, tech companies are going to be a little stinky now. Time for some good tech shorting.
Plus, startups just outsource now. No more need for options.
But most Silicon Valley stock options weren't that way - they were for pre-IPO companies developing The Next Cool Product, and valuing them for expense purposes was nearly impossible and certainly wildly inaccurate. If the product did in fact ship and turned out to be The Next Cool Product, they were worth a huge amount of money (unless it was the Next Uber-Cool Dotcom Product with No Business Model, in which case they were worthless); if the company folded or the product didn't sell, options were worthless, and if you were lucky, they were somewhere in between. My wife's last startup company valued their options at $3.00 the week she was allowed to exercise them, because that was the fictitious-VC-pricing number that week, so that's what we had to pay Alternative Minimum Tax on; they never did go public, and when they eventually sold off the intellectual property and a dozen people to another company, things got arranged so option-holders got 5 cents per share.
Bill Stewart
New Fast-Compression-only CPR http://preview.tinyurl.com/dy575ks
The problem of course is that it's ambiguous. Most people are smart enough to figure out what 22/11/99 means, even if they live in the U.S. However, if some company announces a product release date of 08/02/05, what does that mean? Next month? This summer? Three years from now?
Unless your audience already knows what format you're using, it helps to write the date in a way that's unambiguous.
Remember the days when Republicans were the party of fiscal responsibility?
... about technological lingo.
Now I have a shinny example of obfuscated English language from another field of human knowledge.
Well, I am guessing some knowledge is contained in the intro, because frankly I have fuck idea what they are talking about.
IANAL but write like a drunk one.
Companies shouldn't be allowed to expensive giving an "option" to an employee. At best they should be able to expensive it ONLY when the employee excercises that option. When a company gives an employee an option to something that the employee may not want nor ever use, the company is getting a dumping ground write-off where as the employee STILL has to expend money AND pay taxes on the speculative venture.
The only thing that businesses should have the ability to write off is actual tangible stock grants - not options. The value of an options is $0.00, so unless they are getting nothing in their writeoff it shouldn't be allowed.
OK, so I'm not an accountant, but I do know about "offsetting" ledger transactions. If we have an expence, doesn't that mean somewhere there's income. I fully expect that the tax man will decide that if the corporations must account for options as "expenses", then, to the receiver (you and me) it must be income --- Ah, another chance to collect some income taxes....
Since 1994 companies have been estimating the value of their compensation options and reporting this as a footnote in their annual reports. For example in Microsoft's 1999 annual report, you can easily tell that option grants that year amounted to $1.6 billion ($52,000 per employee), and the value of outstanding options was $69 billion ($2 million per employee; yes, that's correct).
So while it's true that earnings have been overstated, it has been possible to track the value of options and correct earnings. Joe Sixpack investor may not have been making this correction, but professional investors should have been doing it.
I advocate expensing, but it won't be the huge substantive issue it's being made out to be. These numbers haven't been a secret in the past.
An ESOP (employee stock option plan) is a radically different animal than the options that are traded at the CBOE and you can get quoted on Yahoo Finance.
:)
The ESOP (or ISO, incentive stock option) is not a liquid security for one (i.e. you can't just call up Schwab and sell them your options). Black-Scholes is designed to model a freely traded derivative type of option, so a lot of the parameters that go into the model are going to be fudge-factor-central when the thing you are trying to model doesn't really fit the model...
That's why they are thinking of changing the model for ISO/ESOP (Employee Stock Option Plans).
This whole change really only affects employees of public companies. Early-stage startups have accounting that barely makes any sense to begin with, they are running at a huge loss usually since no revenues but paying salary means loss -- the people who acquire or fund such companies are already going to be familiar with the accounting and have ways to adjust their pro forma estimates accordingly.
It's going to screw the rank and file at Fortune 1000 tech firms most likely. You may find your options go away, you get less of them, they are given to fewer people, or you get restricted stock awards instead (which have much worse tax consequences for the employee, and less flexibility, but are more determistic for the company's financial statements).
As an investor, I cheer. As a potential employee, it sucks. Guess it's back to the early-stage startups for me again...
I have previously ranted about the valuation of these options here on Slashdot. I realize that such is not in the Slashdot tradition, but rather than continuing to just rant, I actually spent some time this weekend to do something about the problem.
Since I am a quant, I created a model (released at my public website under the GPL) for pricing employee stock options properly. Or at least more properly than people are doing right now. Much as I dislike working in Excel and VB, I decided they were the way to reach the widest audience of accountants, so the model is in VB and I included an Excel spreadsheet.
Let's hope the accountants find this model and start using it. FASB 123 requests that they use Black-Scholes or a binomial variation. It's time they did it right!
Moderators, I realize it's late in the game for such a post, but I really hope this model or a similar one improves the accounting standards in this country...I could use a little love. Thanks!
My wife, a CPA/CFA had this to say when I emailed her the link to the article. I include her response her for information: "Should options be counted against revenue in the period for which they are given? Most of the time, I think -- yes. People measure their compensation here and now. It is important for the company to do likewise. I don't think geeks really see their options down the road, they think of them in the present tense, hence, they are a current expense."
We're through being cool! Eliminate the ninnies and the twits! -Devo
Personally, I work as an independent contractor, and I never have to worry about bogus 'compensation' like stock options and "health benefits."
BTW, my friend in the above example was held liable by the IRS for the value of the stock at exercise time for all unsold stock, even though the stock by the time she could sell it was worth far less than the value when she exercised it.
Cap.
By the taping of my glasses, something geeky this way passes
Greetings. I am new here, but not at all new to the subject at hand. Having read many of your posts concerning employee stock option (ESO) expensing, I can only say most of you are at least partially wrong in how you interpret the impact and significance of this looming change. There are many companies out there, whose truly pathetic operating performance will be laid bare. In particular, I am amazed at how some of you think options grants have no impact on the books. They have an enormous impact. In fact, I could rattle off several companies that, without their ESOs, would not even be cash-flow positive. The combination of exercise cash (paid by optionees) and tax deduction (equal to the delta between exercise and market prices at time of exercise) is the only way many companies could even stay in business. Yahoo is one that we all know. Sounds like a good trick, but is this the kind of company you want to invest in? Of course not. If a company, years after going public, still cannot generate a postive operating cash flow without selling more and more dillutive stock to boardmembers, executives and employees -- at below market value -- who then promptly dump these dillutive shares on sharholders, perhaps the company shouldn't be in business. There is no doubt in my mind that, as this issue gains broader understanding, the market at large will find it has grossly misallocated capital, and there will be an efficient reallocation. June 15 is the effective date, but I doubt big money will wait for everyone to gain understanding. I expect they are already "reallocatiing" and that may even be part of the markets decline of the last few weeks. Some big-name companies we all know are going to be punished severely. And they deserve it for the heretofore legal ponzi scheme they've been perpetrating. If any of you are familiar with Broadcom (BRCM), they are the worst ESO-abuser our research has uncovered so far. It would not surpise me to see their stock in single digits within nine months. I welcome comments and questions.