Replies

Congress has GOT to close this loophole.

I have read both sides of the "expensing options" argument and I do not feel that the proponents of expensing have a good case. Expensing options is only an estimate as to how many will be eventually exercised. For instance, in this down market, there certainly aren't many being exercised. Yet, under "expensing" many of these options would therefore have erroneously stated earnings in previous years.

People whose opinion I respect claim that options are adequately accounted for in corporate reports - for anyone who is interested in seeing them.

Most of the arguments I've heard for expensing stock options indicate a flawed understanding of stock options and/or political motivation.

An option is a right to purchase a stock at a given price, which may be higher, lower, or equivalent to the stock's prevailing market value. There is no transfer of funds anywhere when a company grants a stock option. When the option is exercised, the holder, or executive as the case may be, purchases the stock from the company at the stated strike price with his or her own money. If this price is below the market's current price for the stock, then, it may seem that the company is selling for a loss. However, in most cases, the corporation's cost basis for its own stock is zero, in which case the transaction generates a taxable capital gain. If these sale proceeds are not recorded as income in corporate financial statements, then there is no gain to offset. For the executive, realization of a capital gain incurs a tax that they must pay themselves.

The irony of "expensing stock options" is that it will enhance long-term earnings by giving corporations a tax deduction ("expense") without any related actual cash expense or asset outlfow whatsoever. Therrefore, policy makers pushing for such new accounting will acheive the very opposite of what they intend.

The most direct loss from the exercise of executive stock options is in their dilution of the shareholder's proportionate interest. However, as far as I have been able to tell, only executive stock option plans approved by shareholders are implemented.

I am surprised to see Buffet, Greenspan, and Coca-Cola come out in support of expensing stock options. Such must be based on information I lack, or politics.