How Much is that Stock Option?

The WSJ has an article today that focuses on another FASB rule that will affect the expensing of stock options. The more famous new FASB rule will require companies to expense stock options in financial statements in the second half of 2005. In addition, as the WSJ article reports, companies will have to disclose share repurchase plans made in connection with curing dilution caused by exercises of stock options. This move is to answer the complaint of companies that expensing stock options is inaccurate because stock options do not cost the company anything but merely result in share dilution. If both stock option grants and proposed share repurchases are disclosed, then investors can decide whether the stock option grants are costless. However, money is of course fungible, so this rule will move the fight sideways with companies arguing that repurchase plans are for reasons other than curing share dilution. For example, a spokesman at Intel states that reversing share dilution was not a reason for any of its share repurchases in 2003, which totalled more than $4 billion, so Intel would not need to disclose anything.

As a side note, the FASB stock-option expensing rule was approved even in the face of legislation introduced on November 21, 2003 (the "Stock Option Accounting Reform Act of 2003"), which sets out much laxer rules and amends the Securities Act of 1933 to prohibit the SEC from recognizing any accounting rule set by the FASB if it conflicts with the Act. Interestingly, the bill (H.R. 108-3574) was authored by a group of eight representatives, four from each major party. I was intrigued that four Democrats were authors of this pro-business bill. But, wait -- all four Democrates are from California (Northern, that is). Oh, it's a pro-technology start-up bill. I am so naive. According to the Thomas website, the bill has passed the House and is currently in the Senate Committee on Banking, Housing, and Urban Affairs.