Disclosing Information On Stock Options
May 3, 2002
Eight years ago, the Financial Accounting Standards Board proposed a new standard that would require firms to account for the value of executive options in their balance sheets and income statements.
But Silicon Valley and Wall Street united in their opposition to the proposal and a battle ensued. The opponents won and the proposed standard was laid to rest.
But the recent accounting scandals -- which also involve options -- have reignited the debate and reenergized the arguments of options-disclosure proponents.
- Opponents contend that disclosure would adversely affect share prices -- that if investors only knew how much their equity claims on a firm could be diluted by options, they would pay less for their shares.
- Of course they would, proponents respond, and that's precisely why such information should be made public -- to remove the current distortions and allow resources to flow more efficiently.
- Critics also claim that it is impossible to value options accurately.
- But proponents point out that companies do have ways of calculating the value of options and do it themselves all the time -- just as they estimate depreciation costs.
Tightening rules for accounting of options would signal to the world that the U.S. is serious about openness, serious about improving its accounting standards and willing to learn from its mistakes.
Source: Joseph E. Stiglitz (Columbia University; recipient of the 2001 Nobel Prize for Economics), "Accounting for Options," Wall Street Journal, May 3, 2002.
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