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February 12, 2002
Proposed Legislation to Change Stock Option Accounting

It looks like FASB is at it again. This column by Bambi Francisco at CBS Marketwatch talks of Senator Levin (D-Mich) and Senator McCain (R-Ariz) introducing legislation to change the accounting of stock options such that they will be a bottom line compensation expense.

Though I certainly see the argument, I have two huge problems with this. First, accounting for options as an expense totally ignores the downside of stock options which is dilution. Companies end up taking a real cash expense by going out into the market and repurchasing shares or using derivatives to reduce that dilution and subsequent hit to EPS. The larger and more important issue in my mind is that it continues to push GAAP accounting further from the only reality that matters - Free Cash Flow... Pro-Forma results are going to be forced on tech companies even more than they already are. At least the in process R&D issues as against purchase accounting are finally resolved in a decent manner. Don't let me get started on the opportunistic timing of this political move however...

Posted by hoffmang | February 12, 2002 05:02 PM

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