Expense Stock Options
August 2, 2002
Nearly all scholars in the fields of accounting and finance believe that the value of employee stock options should be expensed on a firm's income statement at the time they are granted.
There are compelling reasons for this:
- When a company grants options to employees, it has given up something that has considerable value -- and that value can be determined by using competitive bids from investment banks, or inferred from the prices of other securities that are traded on markets, or through the use of mathematical formulae and models.
- Although grants of stock options may not involve cash outlays, companies do record outright grants of stock to employees as compensation, as well as future employee pension benefits -- and stock options should be treated the same way.
- The value of a stock option to a company is its cost -- the cash foregone by granting the options to an employee rather than selling them to external investors -- not its value to the person who receives it.
Opponents of expensing argue, on the one hand, that the information is already disclosed in footnotes to corporate financial statements, and, on the other hand, that expensing would hurt companies. But if deducting the expense of options that are already disclosed in footnotes would drive the stock price down, then the disclosure alone was inadequate to capture the underlying economic reality.
Source: Zvi Bodie, Robert S. Kaplan and Robert C. Merton, "Options Should Be Reflected in the Bottom Line," Wall Street Journal, August 1, 2002.
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