Accounting in the new Market
because options are usually priced at the market value at the time of the grant (market price=$50; option price=$50; $50-$50=$0). The fair market value is then put into a
footnote.10 The opposition comes from the push to use the fair value method because use of this method could cause earnings to be reduced drastically in some situations.
Other Issues
A related concern is the dilution of equity when employee stock options are exercised. The greater number of shares outstanding after exercise means
proportionately lower earnings available to the original shareholders. 3 If properly accounted for, observers believe that investors will become fully aware of this dilution and many share prices will appear far overvalued, leading them to fall sharply. 6 If reported earnings fail to deduct stock options, this may mislead investors and keep them in the dark about the size of the future earnings
dilution. In sum, this argument suggests that investors need better estimates
of earnings in order to value equities properly. 3
The line is drawn. Investors and legislators stand on one side and
companies on the other, though a few companies, such as Coca-Cola, have now
agreed to begin expensing options. 3
1 Intermediate Accounting Textbook, Tenth Edition; Kieso, Weygandt, and Warfield.
2 “Reforming stock options in the Post-Enron, Post-WorldCom Era,” Rosen, Corey; July 2002. www.nceo.org/library/reforming stock options; November 5, 2002.
3 “Deducting the Options Expense: Much Ado About Nothing,” Strategic Finance, October 2002; Deshmukh, Howe, and Luft. InfoTrac Web: General Business File; November 4, 2002.
4 “National Business Panel Supports Expensing Stock Options,” Knight-Ridder/Tribune Business News; September 18, 2002. ETSU Library Online Article Search, InfoTrac Web: Info Trac OneFile; November 4, 2002.
5 “Stock Options and Related Matters,” Remarks by Chairman Alan Greenspan; May 3, 2002. www.federalreserve.gov/BoardDocs/Speeches/2002; November 1, 2002.
6 “How stock options affect Corporate Profits,“ Bartlett, Bruce; September 8, 1999. www.ncpa.org; November 5, 2002.
7 “Expensing those Expensive Options,” What you need to know about stocks. www.stocks.about.com/library/weekly; November 5, 2002.
8 “Expensing Stock Options Is a Faddish Fraud,” Alan Reynolds; July 18, 2002. www.creators.com; November 1, 2002.
9 “The Value Proposition,” CFO, The Magazine for Senior Financial Executives, October 2002; Tim Reason. InfoTrac Web: General Business File.
10 “The Stock Options Controversy And The New Economy,” James V. DeLong; June, 2002. www.cei.org; November 1, 2002.