The 'real' numbers behind stock expensing

2 min read
In response to the Perspectives column written by Charles Cooper, "":

For someone who writes about high-tech issues regularly, I am highly disappointed by your comments on the House attempt to override the FASB proposed rules on expensing stock options. What shocks and disappoints me the most is your comment that "?a requirement that companies report real numbers doesn't sound particularly onerous."

Therein lies the rub: As proposed by the FASB, the numbers a company would be required to report as its stock option expense is no more real than not expensing them at all.

Under the proposals, when options are granted, a company must apply a formula to derive the so-called expense. But the actual economic benefit that the employees eventually receive (if at all) may not bear any resemblance to the expense, because the formula is based on past history and future speculation. So how does that make the company's expense "real?" (It's also why most of the savvy Wall Streeters will likely ignore the expense, anyway--so what's the point?!)

If the requirement was to report an expense upon exercise, it might be somewhat more meaningful, because the actual economic benefit to the individual could be objectively measured: Number of Company X shares (market price minus exercise price). However, if a company were required to record that value as an expense, that is no more real than recording no expense! Why? Unlike other true expenses, upon exercise of a stock option, the company receives cash instead of reducing its cash. Where is the economic cost to a company in that transaction?

In truth, someone does pay for this exercise, but it is not the company--rather, it is the other shareholders, whose investment becomes slightly diluted by the exercise of options. And this is why the traditional method of computing earnings per share on the basis of the diluted number of shares outstanding is a much more meaningful way of measuring the effect of stock options on a company and its shareholders.

I equate a stock option to a promise of a bonus at sometime in the future. If my CEO promises to pay me a bonus only if certain things happen, accounting says no expense is to be recorded unless those certain things have actually occurred. But the way stock option expensing now occurs, a company records an expense even if the option never gets exercised!

So I say: Let's get real about this stuff!

Alan Miller
Uniondale, N.Y.