Expensing Options – The Uncertainty of Accounting

Louis Lavelle isn't pleased with a new Senate proposal to expense options for the top five executives in a firm.

Is a solution at hand? Hardly. If anything, Enzi's bill simply replaces one accounting fiction with another. The bill, which purports to bridge the gap between expensing and antiexpensing factions, does nothing of the sort. It would require expensing only of options granted to each company's chief executive and the four other highest-paid executives — and mandate the use of a valuation method that amounts to a cure worse than the disease.

Enzi argues that Black-Scholes "doesn't reflect the true value of options for accounting purposes," and that the "truing up" provisions in his bill will allow businesses to adjust option expenses when they're used or expire. "Companies must be able to recognize the true expense of stock options on their financial statements," Enzi said at a Capitol Hill press conference announcing his bill's introduction. "Unfortunately, the current valuation models for stock options — Black-Scholes, binomial, Crystal Ball, and others — are horrible indicators of the true cost to a company of stock options."

Some of you probably wonder why this is such a big deal. What I doubt most people realize, is that accounting is not as cut and dry as everyone thinks. The intention of accounting is to record the economic picture of a company, but this is a very tough problem. There are plenty of debates within the accounting community about the proper way to account for certain complex transactions. Accounting is not, and never will be perfect. That is why company earnings must be taken with a grain of salt. As for the options debate, I lean towards expensing them, but really as long as the information is available in some form, investors should be able to figure out the impact on earnings.