Expensing Stock Options
A stock option is an offer that the company provides to its employees, to benefit from future growth. It not only acts as a motivator, but it also indicates the company’s willingness to treat its employees as partners, rather than workers.
Expensing stock option principle simply states that the companies should be held accountable, for the stock they offer to employees. Since companies were not receiving any monetary benefit that they would have received, had they sold the stock in the open market, the value of the stock given should be calculated, and shown as an expense. The Black-Scholes Model is widely regarded as a standard method to calculate the price.
The Financial Accounting and Standards Bureau (FASB) had advocated the expensing of options way back in 1993. The Wall Street as well as the hi-tech companies of the Silicon Valley had raised strong protests against it. Finally, the FASB had to succumb to the pressure when the legislature too opposed, the ‘FASB Statement 123’, and it was forced to revise it. The revision, now made it mandatory, to include the disclosure of options cost as a footnote. The software companies did have a valid point, that a stock option was perhaps the main incentive they could offer. At that time, their industry was still in a growing stage, and offering the employees a share in the future pie, was an effective way to keep them motivated. Stock options are a form of payment in kind, or they can also be termed as perks, offered to employees as incentives.
However, recently when companies like Qwest and Enron were caught trying to show inflated net earnings and income per share, the importance of expensing stock options was again stressed upon. The top executives who owned large parts in stock options, benefited greatly, while the common American public had to face severe losses.
Recording expenses at the time when the stocks are issued is what the FASB stresses at. It advocates that in order to ensure a level playing field for all companies, it is a must. However, corporate governance as widely reported, stands quite unaffected by expensing the stock.