Apple Computer, other companies told to start expensing options by FASB

“The nation’s accounting rulemaker decided Thursday that companies will have to begin deducting the value of stock options from their profits next year, removing a cheap way to compensate workers that had been abused by executives and clouded earnings,” Michael P. Regan reports for The Associated Press. “The move has been cheered by shareholder advocates but scorned by many companies who rely heavily on options to beef up compensation packages.”

“The Financial Accounting Standards Board’s long-awaited decision calls for public companies to start expensing options beginning with their first annual reporting period after June 15, 2005,” Regan reports. “Many employees of companies like Microsoft Corp. and America Online famously became millionaires in the 1990s thanks to stock options.”

Under current accounting standards, a company’s cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the income it reports to investors. The new rules will instead force companies to subtract the option expense from earnings, which could dramatically knock down profits at some companies,” Regan reports. “For instance, Apple Computer Inc. said in its latest annual report that its fiscal 2004 earnings would be cut from 71 cents per share to 44 cents had it expensed its options at their fair-market value.”

“But the FASB’s actions are far from being set in stone considering that Congress has the power to mute its action. A bill passed through the U.S. House of Representatives last summer that would require companies to only expense the options granted to their five top executives, though that piece of legislation is currently stalled in the Senate,” Regan reports.

Full article here.


  1. All companies should be required to expense the difference between the fair market value and strike price of exercised options when they are exercised.

    It is unreasonable to require companies to expense options at the fair market value if the strike price is higher than the fair market value (as occasionally happens) since the options may never be exercised.

    The only real loss in income (sort of an expense, but really it is the loss in capital investment) is the loss due to the difference between the fair market price (the price at which the company could have theoretically sold the options) and the price at which the company actually did sell the stock — the strike price.

    Additionally, it only makes sense to expense them when the options are exercised. There are many cases where options are never exercised. The company should not have to expense those options since there is never any loss in revenue due to unexercised options. And no, you can’t realistically claim the loss is based upon authorized shares when only issued shares and paid for shares truly generate capital investments.

  2. I agree with what he / she said above.

    Options only effectively cost the company money if they have to subsidize the price of the shares when exercised.

    Given that the the company will be paying itself, does it really matter?

    Maybe this should be considered as assets instead. That is the company will have less non-issued stocks to play with. In that situation the company should dislose how many stocks have been exercised (true asset loss) vs. number of non-exercised stocks (potential asset loss) vs share outstanding (those allocated and those in reserve).

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