Expensing Stock Options

Expensing Stock Options. The debate on expensing stock options.

Looking at it retrospectively, the concept of expensing stock options appears to be a see-saw ride - its supporters and opponents switching sides every now and again.

Though primarily regarded and planned as a method for streamlining corporate accounting system involving its net worth vis-a-vis share value, and a provisional boost up between the company and its employees, people have expressed their doubts about its efficacy in more than one way. When the issue of expensing options came up sometime back both Wall Street and Silicon Valley lined up solidly against the idea. Many lawmakers and the major auditing firms soon followed suit, accepting the popular argument that the accounting shift would deal too painful a blow to US companies. Some even commented that it is a legally illegal way of diluting company shares.

However, according to one corporate accounting guru, "Expensing stock options, far from being an accounting requirement, has now transformed into a corporate governance concern the international corporate world is veering around to the view that expensing stock option is mandatory." But then, what really is the right method to expense stock options? The answer seems to have come from the same mastermind: "At the peril of offending the established Oracle of stock market investing" he signals "one continues to be a votary of granting employee stock options at a discount to the prevailing market price. In the knowledge economy, the value of the enterprise and consequently the profits it would generate for the ordinary shareholder is disproportionately dependent on the company's employees - more specifically their intellectual capital. They make contributions an ordinary share holder is not called for to make, whose primary responsibility is to make financial contributions to the equity of the company.

If the company accrues loss in the process - this loss may be treated like the premium a company collects over the face value of a share, which did not constitute income. Instead, it went into the share premium account, in other words, into the capital employed by the company. Precisely, this represents the potential money that could have been collected by the company from the market, but was not. The company chose consciously to forgo this amount in favor of investing in the employee.

In face of sundry adverse renderings, it is worthy to note that Coca-Cola, Amazon, GE, GM and a host of other corporate giants are now expensing options voluntarily.