accounting and stock options
On Saturday there was a story on Marketwatch.com concerning Time Warner's decision to stop issuing stock options as compensation to MOST OF ITS employees. The article provides the following information:
The media giant said Friday that new financial reporting standards that require companies to treat stock options as expenses make it "prohibitively expensive" to grant the options to all employees, according to a New York Times report.
Time Warner said it will continue to grant stock options to some workers based on their job responsibilities and industry practice.
The accounting change for stock options can be summed up by this statement by the FASB about the revised standard for stock options (FAS 123R):
As stated by the FASB, "FAS 123R will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees."
The change in accounting simply requires that companies that once disclosed the cost of stock options in the footnotes now show an expense and increase in equity for the fair value of the options granted. It is difficult to understand how simply the recognition of an expense as opposed to its disclosure can somehow make it "prohibitively expensive".
If Time Warner had paid for advertising by issuing stock options would that advertising have been less expensive than if it had been paid for with cash?
Stock option accounting can create great discussions in class as students examine the issues surrounding the topic.
The media giant said Friday that new financial reporting standards that require companies to treat stock options as expenses make it "prohibitively expensive" to grant the options to all employees, according to a New York Times report.
Time Warner said it will continue to grant stock options to some workers based on their job responsibilities and industry practice.
The accounting change for stock options can be summed up by this statement by the FASB about the revised standard for stock options (FAS 123R):
As stated by the FASB, "FAS 123R will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. This Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees."
The change in accounting simply requires that companies that once disclosed the cost of stock options in the footnotes now show an expense and increase in equity for the fair value of the options granted. It is difficult to understand how simply the recognition of an expense as opposed to its disclosure can somehow make it "prohibitively expensive".
If Time Warner had paid for advertising by issuing stock options would that advertising have been less expensive than if it had been paid for with cash?
Stock option accounting can create great discussions in class as students examine the issues surrounding the topic.
posted by Don Pagach at 12:15 PM
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