Dollars and Jens
Friday, July 23, 2004
Stupid Option Tricks
What's the dumbest thing you've ever heard? I'll bet I can top it.

As you know, there has been a debate in recent years over whether to count stock options issued by companies as an expense. Under current accounting rules, companies are allowed but not required to treat options as an expense on their income statements, but they are required to disclose the value of any options issued in the footnotes to the income statements. FASB has recently proposed that companies be required to expense their options. This is sensible -- things of value given up in exchange for labor services are, logically, salary expenses. And any company which disputes that options are "things of value" should feel free to send me some.

According to the Wall Street Journal, the U.S. House of Representatives recently voted to overrule FASB. This is dumb enough, on both procedure and substance, but it gets dumber: the bill they recently passed would require only stock options paid to a company's top five executives to count as an expense. They want to cut the baby in half.

Frankly, the status quo ante is tolerable to me -- as long as I can figure out a company's actual expenses (by looking through the footnotes), it's not important to me how wrong the financial statements themselves are. The current method that most companies use to calculate their expenses is obviously wrong, but it's not a problem. And the bill working its way through Congress wouldn't actually make things any worse, unless it weakens the footnote requirement. But it sure is dumb.

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