Expensing Stock Options

This article tells you about Expensing Stock Options. A stock option is an offer that the company provides to its employees, to benefit from future growth. It not only acts as a motivator, but it also indicates the company’s willingness to treat its employees as partners, rather than workers.

Expensing Stock Options

Expensing stock option principle simply states that the companies should be held accountable, for the stock they offer to employees. Since companies were not receiving any monetary benefit that they would have received, had they sold the stock in the open market, the value of the stock given should be calculated, and shown as an expense. The Black-Scholes Model is widely regarded as a standard method to calculate the price.

The Financial Accounting and Standards Bureau (FASB) had advocated the expensing of options way back in 1993. The Wall Street as well as the hi-tech companies of the Silicon Valley had raised strong protests against it. Finally, the FASB had to succumb to the pressure when the legislature too opposed, the ‘FASB Statement 123′, and it was forced to revise it. The revision, now made it mandatory, to include the disclosure of options cost as a footnote.

The software companies did have a valid point, that a stock option was perhaps the main incentive they could offer. At that time, their industry was still in a growing stage, and offering the employees a share in the future pie, was an effective way to keep them motivated. Stock options are a form of payment in kind, or they can also be termed as perks, offered to employees as incentives.

However, recently when companies like Qwest and Enron were caught trying to show inflated net earnings and income per share, the importance of expensing stock options was again stressed upon. The top executives who owned large parts in stock options, benefited greatly, while the common American public had to face severe losses.

Recording expenses at the time when the stocks are issued is what the FASB stresses at. It advocates that in order to ensure a level playing field for all companies, it is a must. However, corporate governance as widely reported, stands quite unaffected by expensing the stock.

New technologies can increase stock prices, related with these companies. It is advisable to remember that not all technologies succeed and it is important to be well informed. While making stock investments for the future, people tend to make mistakes and end up taking wrong financial decisions.

Necessary precautions are required to be taken before making any stock investment. Carelessness may prove to be devastating to a fortune built up over a period of time. Stock investments are often perceived as risky ventures that many people avoid.

However, advice received from a competent investment or financial advisor has now made the process of investment comparatively safer. These advisors have a great deal of information and experience in investment and have detailed information on various stock options available in the market. They guide stock investors on the advantages and disadvantages of each and help them to invest accordingly.

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