Comments on: Expensing Options Is Bad Accounting?

By: david foster

david foster — Thu, 24 Aug 2006 04:17:05 +0000

…my point being not only that options are a form of compensation, but that it is misleading to show them on the books as a contrived expense item.

By: Rob

Rob — Thu, 24 Aug 2006 03:21:55 +0000

David,
I agree. Options are usually a form of compensation. In many cases, they are given in lieu of a higher salary.

By: Don Lloyd

Don Lloyd — Wed, 23 Aug 2006 18:47:13 +0000

If your company takes in $5 in revenue every day and spends $4 in cash a day for all of its inputs, it will accumulate $1 per day, every day. Even if you give away half of the remaining company every day, that $1 a day will still be accumulating. It is only who has how much of a claim on that $1 per day that is affected.

A business and its owners are distinct entities.

Regards, Don

By: david foster

david foster — Wed, 23 Aug 2006 16:12:14 +0000

A fundamental problem with options expensing is that it tries to convert *division* into *subtraction*, which is not possible.

If a company pays someone $50000, that $50000 is a definite amount subtracted from cash. If the company pays someone with options, the effect is to potentially dilute the shares and hence reduce EPS for the existing shareholders. Since dilution increases the denominator on the EPS calculation, the “cost” of that dilution to the existing shareholders is not a constant knowable at the present time, but is rather a function of future earnings.

By: Elmar

Elmar — Wed, 23 Aug 2006 15:18:15 +0000

If you raise capital in an inefficient way, you leave money on the table – That $5 difference could have gone to the owners of the company, so it is a “cost/loss” in the sense of “I, the shareholder, have less money”.

The point here, though, is that it is a cost to the *shareholders*, not the company. It doesn’t affect the company’s bottom line, since it doesn’t have to spend those 5 bucks.

The problem is that if you pay someone with options, you take something that *is* a cost to the company (that person’s salary), which means lower profits, and therefore lower shareholder value, and convert it to something that is a direct loss to the shareholders.