Technosailor.com

Came across a great article on Expensing Stock Options on Jeff Nolan’s blog: He points out some critical things: “The issue for me came down to the following points: – The valuation method FASB is proposing is Black-Scholes or binomial, either one is hardly the best measure of incentive stock option value because neither was developed with that in mind, at least anything other than freely tradable options. Black-Scholes is a deriviative pricing algorithm, while incentive options are deriviatives only when they are fully vested and freely tradable. – The expense hit is irreversible, meaning that options that are clawed back to the company for whatever reason would not see the expense they incurred in earlier periods reversed. – This will result in further complexity in financial reporting for public companies, with companies continuing the trend of pro-forma results. In other words, we will see companies reporting official results with expenses for options accounted for and pro forma results that show the Street “this is what our actual earnings are after backing out the non-cash options expenses”.We do NOT need more financial reporting options on the street, we need reports that reflect the actual operating performance of a company. – Finally, this measure will do nothing to curb excessive option granting to the top executives of companies.”

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Written by Steven Fisher on February 20, 2006

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