| Exercising Caution |
17 March 2003
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FASB Decides Options Have Value
The Financial Accounting Standards Board, an industry body that oversees accountants, has decided that stock options should count as expenses when balance sheets are drawn up. This is, of course, the right decision, but one wonders what in the name of all that's sensible did they think before?
Prior to this ruling, companies could hand out millions of dollars worth of stock options and footnote it in the annual reports. It did not appear as a liability anywhere else. Yet, by doing this, they were, in effect, diluting the value of the stock of the shareholders -- one hesitates to say the stock was being watered, but it came very close in certain situations.
The real problem with this is not so much the accounting, but rather with the way it gets employees to focus solely on the stock price. Now, there is nothing wrong with boosting the value of shares. What is wrong is boosting it without actually creating any wealth, e.g., Enron's habit of booking off-setting trades as profits. The price of the stock went up, but there was nothing supporting it in the way of real business.
The usual whining has begun, and the biggest complaint is that it will cut into the profits of some firms. One is tempted to reply that is the equity is to be diluted, some accouting of it should be made. After all, increasing the number of share to provide for Peter reduces, by supply and demand, the value of Paul's shares.