— More Than Zero explores some of the implications of expensing stock options:
Another amazing facet of the public debate on this topic is that no pundit I’ve seen has considered what happens after the options have been expensed and they expire (as they sometimes do). Let’s imagine we have expensed $25 million of options and given them to our CEO. The option term has expired, the options were worthless. Now we get to take the expense back (the books don’t balance if you don’t!). Companies could have a lot of fun with that by issuing a series of complex, long-dated deep out-of-the money options with impossible employment contingencies in order to create a reserve during flush times. Talk about managed earnings!
So expensing options creates the opportunity for more shenanigans than it forestalls. Sticking to real expenses and real earnings is the best route, no matter what Jimmy Warren Buffett has to say about it.
Agreed, but….
1) If options exposure is material, financial statements could split income into two categories in much the same way that earnings per share are expressed on “unadjusted” and “fully-diluted” bases. Hence, Income, Contingent Liabilities and Shareholders Equity would be calculated before and after the effect of options, and shenanigans would at least be transparent to investors.
2) Focusing on employee options clouds over the more pernicious type of options: derivatives (read “risks”). The accounting profession has failed over more than 15 years to get its act together on these products. The simplest solution is to require that all derivative contracts be listed in the financial statements.
3) Greater disclosure as above has the disadvantage of making financial statements less comprehensible to the common man. Sorry ’bout that; I see no alternative, given the increased sophistication of financial technology over the last two decades. Perhaps, even, some of the problems we are seeing today result from the well-meaning principle of keeping financial statements as simple as possible. Greater dependence by investors on research analysts is inevitable, and should be dealt with by requiring Wall Street firms to spin off their research departments.
I did a search in the search engines on “professional accountant blog” and I found your web blog.
I am a Chartered Accountant in Halifax, Nova Scotia, Canada and thus my interest in searching for a company blog on the WWW looking to see how the rest of the world thinks about accountants and see what trends and technology are happening in the world. I also was interested in a blog for myself and possibly leading to a blob for my accounting business, you never know, that is if I can understand the technology of operating a blog and from what I see I am somewhat hesitant at the present time.
It has been interesting reading.
Respectfully yours
Stephen B.,
A Halifax Chartered Accountant