FASB: Stock Options Must be Deducted

Uh-oh, that’s gonna leave a mark:

FASB: Stock Options’ Value Must be Deducted From Profits Next Year

The nation’s accounting rulemaker decided Thursday that companies will have to begin deducting the value of stock options from their profits next year, a move 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 means
public companies will have to start expensing options beginning with their
first annual reporting period after June 15, 2005.   

Dow Jones Newswires

There’s a reason that so many tech firms have been lobbying against the FASB rule change. Many firms that managed to show profits in the 90’s turn out not to be so profitible after all, if you count what they spent on options / share repurchases.

Any of the firms (typically tech firms) that issue a lot of stock options are going to see their balance sheets get rather ugly next year. Taking these charges means a lot of companies that used to have reasonable P/Es will look far less cheap next year.

Stock options are no longer off balance sheet — they are an expense that must be fully and transparently accounted for . . . and that may leave a mark on quite a few balance sheets.

If you have been looking for an excuse to dump your Nasdaq issues, the new FASB rules on Stock options is it.

Regardless of your views on this rule, it now makes a slew of equities much much more pricey. All of your favorite former high flyers from the 1990s — it turns out that they were never really all that profitible — assuming they have to expense stock options like they are supposed to . . .


UPDATE: March 17, 2004 2005 9:41 AM    
Is it just me, or has no one really grokked the significance of this to tech firms?


FASB Rule Issuance on Employee Issued Stock Options

Companies Told to Start Expensing Options

Stock option expensing required next year
Ed Frauenheim
CNET News.com, December 16, 2004, 3:49 PM PST

New rule: Firms must expense options
December 16, 2004: 5:13 PM EST
NEW YORK (Reuters) http://money.cnn.com/2004/12/16/technology/fasb_options.reut/index.htm

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What's been said:

Discussions found on the web:
  1. Fabio Lanzoni commented on Dec 17

    Poof! There goes Google’s claims to profitability for the next decade.

  2. The Big Picture commented on Jul 23

    Follow up: Look Out Below

    In the prior post, Options Trouble Punishing Tech, someone in comments asked if this was data mining — taking one market call out of context. Fair enough question/accusation. Let’s put this into some perspective: we flipped Bearish in January 2004 (Ma…

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