Semi-Daily Journal

It has always seemed to me that there exists a fair solution to this question: corporations that use their options as a tax deduction must also count them as expenses, in equal measure. If tech firms do not wish to include them in their accounting, let them argue for the elimination of the tax break; but to be able to count options against revenue for taxes, but not reported profits, reeks of hypocrisy.

Another reason to avoid tech stocks and mutual funds that include them as a high percentage. In Wealth and Democracy, Kevin Phillips points out that the causes of economic bubbles (such as overbuilding railroads) rarely lead the recovery and often remain depressed for years. Having gone through a tech bubble, is there any reason to think that they will be much more profitable in the near future?

Many of the current investment problems are not due to corporate accounting but from too many investors that don't have enough investment advice. A lot of 401K holders are still being told that the best strategy is to consistently buy stocks. That advice should have changed once the bubble appeared. A savvy investment advisor would know that those companies were overvalued.

Jeffrey,

The deduction for tax purposes only occurs if and when the options are exercised, not when they are granted. Shareholders (at least me anyways) want and deserve a fair accounting of the expense of executive and employee compensation when it is dispensed. Finding out how much of my money is being looted by executives only in footnotes or well after the fact when the execs cash in their chips is insufficient in my opinion.

"Only in footnotes" is the key phrase. If having information important to the evaluation of an equity printed in footnotes is insufficient, then one should not be purchasing indvidual stocks. In other words, if ya' ain't readin' the bleedin' footnotes, ya' shouldn' be buyin' the stock. Having said that, the tech execs obviously think their stock is easier to peddle to folks who don't read the footnotes, if the options information is restricted to the footnotes, so they favor continuing such treatment. Personally, I'm agnostic on the issue, but it does amaze me how often people are willing to do more research prior to purchasing a television set than they do prior to purchasing an equity.

"Only in footnotes" is the key phrase. If having information important to the evaluation of an equity printed in footnotes is insufficient, then one should not be purchasing indvidual stocks. In other words, if ya' ain't readin' the bleedin' footnotes, ya' shouldn' be buyin' the stock. Having said that, the tech execs obviously think their stock is easier to peddle to folks who don't read the footnotes, if the options information is restricted to the footnotes, so they favor continuing such treatment. Personally, I'm agnostic on the issue, but it does amaze me how often people are willing to do more research prior to purchasing a television set than they do prior to purchasing an equity.

Two comments:

1) Treating options as expenses may or may not be valid but it will surely continue to push the concept of Net Income (and, if the options are included as an operating expense, Operating Income) to near meaninglessness.

2) The good that will come out of this new treatment isn't quite what proponents are advocating. Under the present system, there is an incentive to issue options at the expense of other, perhaps more effective, corporate-wide performance bonuses due to the perception that options are ignored by shareholders. If options are expensed, I think there will be a push to issue more stock and to give cash bonuses based on performance targets, both of which seem preferable in many ways.

"'Only in footnotes' is the key phrase.'

That is, of course, a silly and rather vain statement. Why then did so many knowledgeable fund managers who clearly read the footnotes take down their clients IRAs with them? Perhaps the footnotes weren't all that clear? I question whether you ever read them yourself, because anyone who did knows the sort of obfuscation that goes into creative footnote writing in annual reports where the regulators have even less sway. I have any number of reports on my desk with notes that I challenge you to credibly translate into standard accounting terms.

The truth is that it's a lot harder to hide the effects when you have to put them on the P&L, where there is a level playing field. It's not that the VCs were looking to take the rubes who can't read to the cleaners, they didn't sell to individual stockholders. They were in the illusion business and they needed something to build the illusion on -- for many of them (and still for more than a few), a P&L that at least hinted at profits. If it doesn't matter, as you suggest, then why wouldn't the techies accept the reverse -- put the options on the P&L and write them away in the footnotes? Same thing, no problem, right? Think that will get many takers?

"Only in footnotes" is the key phrase. If having information important to the evaluation of an equity printed in footnotes is insufficient, then one should not be purchasing indvidual stocks. In other words, if ya' ain't readin' the bleedin' footnotes, ya' shouldn' be buyin' the stock. - - - Will Allen

About as bizarre a comment as one might ever imagine....

Options are compensation to employees. Compensation to employees are a current expense. Therefore options must be deducted from income if accuracy is desired. End of story.

If one suspects that the footnotes are being written to obscure reality, which no doubt is often the case, then it would be wise to refrain from purchasing the stock. Apparently, pblsh, you have a reading comprehension problem that extends beyond footnotes, in that you seemed to have ignored my point that the techies favor the current treatment because it makes their stock easier to peddle. I have no problem with options being expensed, I just doubt it will prove to be a solution to the problem of unethical people who endeavor to deceive. As "bizarre", as it may be, my statement was nothing more than an assertion that one should not buy something as complex as an equity in a very large business without reading all public information available. If that is too much bother, then one better be comfortable with trusting somebody else to do so, but even that approach is problematic, judging by how most actively managed mutual funds perform against their associated indexes. It is not for nothing that Warren Buffett, himself an advocate of expensing options, has stated many times that the average equity investor would be better served by sticking to index funds. Even this approach is problematic in a bubble environment, of course, which is why a total portfolio diversification, with percentages allocated to bonds and cash is probably appropriate for the person who is unwilling to work as hard as Mr. Buffett, or is as astute as Mr. Buffett, at managing investments.

'"Only in footnotes" is the key phrase. If having information important to the evaluation of an equity printed in footnotes is insufficient, then one should not be purchasing indvidual stocks. In other words, if ya' ain't readin' the bleedin' footnotes, ya' shouldn' be buyin' the stock.'

It's not that it's in footnotes, really; it's that the average investor has virtually no way of figuring out what the potential liability of that footnote is worth. Why should they?

Will,

I do not buy stock in companies whose financial statements attempt to hide material information, are too opaque or that I flat out cannot understand. In particular companies that have unexpensed stock option compensation coming out their ears raise a red flag with me. That rules out an awful lot of companies these days. Not sure why you think that's not a problem. A stock market where you have to be Warren Buffett to participate will be a pretty thin market. Of course requiring expensing of stock option compensation will not cure all ills but it is a good step in the right direction. You do not even seem to disagree with that so I do not understand what your point is.

Not to account for the true cost of options is clearly bad accounting but three points should be made:

(1) The efficients market hypothesis suggests that rational investors know how to look into the footnote so whether the information is formatted one way of the other should not affect stock prices.

(2) The traditional version of Black-Scholes tends to overvalue employee stock options but then FAS 123 allows for alternative valuation methods.

(3) For multinational enterprises - the tax issue may be more complex. Often, multinationals try a little income shifting to havens by trying to ignore this accounting issue.

Dan Wrote:

>>>Options are compensation to employees. Compensation to employees are a current expense. Therefore options must be deducted from income if accuracy is desired. End of story.<<<

If only it were so! Count me (abashedly) among the opponents of expensing options. I say "abashedly" because the two most common arguments that opponents make (especialy opponents in silicon valley) are pantently stupid - namely, that options are not a real expense, and that if tech firms were required to expense options their stocks would plummet. Of course options are an expense - people like them and value them, so they must be worth something. Since nothing of value is truly costless, it must be an expense to grant them. And of course expensing options won't push tech firms' stocks into a death sprial - even if the majority of investors don't know what impact options have on firm value, there at least a few wise investors in the world, they tend to have deep pockets, and can thus force arbitrage. In other words, the market more or less takes options into account already, as they are disclosed (at least as fully as they would be under proposed expensing plans) in the footnotes.

But the third common argument against expensing, the one least commonly made, is quite sound - namely, that there's no way to accurately measure the value of options. Its generally bad accounting to report make-believe numbers as fact. Proponents of expensing are correct to point out that Conservatism - the idea that reported numbers should be stated in such a way as to cast the most pessimistic reasonable interpretation of reality - is a bedrock principle of accounting. But they are wrong to ignore the fact that Measurability - the idea that nothing should be reported unless it can be reliably quantified - is an equally important principle of accounting.

So can the economic value of employee stock options be accurately measured? Hell no. Proponents of expensing generally point to the Black-Scholes model as a tool for calculating the value of employee stock options. But Black-Scholes was developed to price market-traded options, which are liquid derivative securities of very short duration (90 days is typical) that trade regularly in a massive market, and that are generally held by people with no influence over the value of the underlying security whatsoever. Employee stock options are nothing like this at all. First of all, employee stock options are not traded in a liquid market, in fact, they generally cannot be sold at all because they are part of a long term employment contract. They have a very long duration, generally several years. And they are held by people who can, by their actions, materially affect the price of the underlying stock.

Black-Scholes makes a number of simplifying assumptions that are valid in the context of the securities that it is designed to price. For example, Black-Scholes assumes that the volatility of the underlying stock (Which is one of the biggest drivers of the option's value) is constant over the life of the option. This is a reasonable assumption when the option is a 90 day contract. But the volatility of the underlying is not at all constant over the many months to several years of life of the typical employee stock option. In fact, the volatility of a stock can swing between just a few percentage points to several dozen percentage points from one year to the next. Thus, Black-Scholes will not apply.

But, proponents of expensing say, the IRS uses Black-Scholes for tax purposes. True, but the IRS also has standard depreciation schedules for travelling salesmens' cars. That doesn't mean that they are reflective of the economic value of those cars over their useful lives. It just means that the IRS, which needs to collect revenue, decides on an arbitrary way of assigning a value to an asset that cannot be definitively valued. But financial reporting to investors is supposed to convey truth, as best it can be known.

But, proponents of expensing say, companies have developed more sophisticated models than Black-Scholes that they use internally for measuring the economic value of options. True, but who is to say which models are correct. Everyone agrees that Black-Scholes does a good job of pricing market-traded 90 day in-the-money calls on GE common. But do you want to open 10k reporting up to petty bickering about whose proprietary model does the best job of incorporating historical data about the impact of the volatility smile in contango market conditions?

The best option (no pun intended) is to keep the financial statements as they are but beef up the reporting requirements in the footnotes. Then investors could make their own decisions about the value and stability of employee stock options.

P.S. One more thing. The equity (stock) in a leveraged corporation (i.e. a company that has any debt or liabilities whatsoever) is itself a call option on the underlying value of the business. If the value of the business is greater than the value of its debt, then you (implicitly) pay off the debt and the remaining value is the value of the equity. But if the value of the firm falls below the value of the debt, you declare bankruptcy, the equity is worth nothing, and you walk away (equity cannot have negative value). So any stock options are actually options on options (compound options), meaning that Black-Scholes, strictly speaking, doesn't apply. Again, this complication makes little difference for market-traded options, because markets only trade on options of big stable companies. But financial reporting standards have to be designed for all companies, and the value of employee stock options will be significantly mis-stated by Black-Scholes if the company in question is dangerously leveraged or otherwise in serious danger of going under.

Joe, perhaps I was being too argumentative, but the words:

"Finding out how much of my money is being looted by executives only in footnotes"...

seemed to imply to me that people who bought individual stocks should not be expected to read the footnotes. Jason then followed up with a valid point, that average investors may have difficulty in evaluating the liability mentioned in a footnote. Of course, this may mean that they should be restricting themselves to index funds. My point was that far too many investors don't read everything they should prior to making an investment; God knows there have been occasions when I've taken a flyer without doing my homework, sometimes to my eventual chagrin.

Investing is goddamned hard work. I was not being flip when I said that many people research their home theater purchases better than their stock purchases, and a speculative environment like we had in the late 90s just exacerbates the tendency. Sure, expensing options might do some good, but just wait until the next speculative frenzy erupts; stock peddlers and unethical executives will simply formulate a new method of enticing those enamored with riding the bubble, without regard to due diligence. I suspect that many of the shenanigans you mention grew much worse in the speculative frenzy, and when the next bubble forms there will be a new set of shenanigans to replace the old.

"So can the economic value of employee stock options be accurately measured? Hell no."

If their worth can't be accurately measured, why are companies so interested in handing them out?

Will, my point was that we don't expect investors to do annoying busywork that requires knowledge of all sorts of information they can't reasonably be expected to have. It's not too hard to figure out a quarterly filing with a little bit of time, but stock options? Should companies have individual investors guess what their tax liability is, too?

SD's post of 3:47 was interesting especially his comment on the 3rd argument against expensing of options. His argument in one way contradicts his excellent statement as to what I called the "efficients markets hypothesis" and in another way makes the "perfect the enemy of the good" (although I tend to hate to quote anything from Daniel Mitchell for other reasons). It is well known among financial economists that Black-Scholes tends to overvalue employee stock options but then FASB 123 allows for other models. Yes, these models may lead to imprecise measures but certainly an assumption that the option expense is zero is very flawed. I agree with SD that whether to recognize expense in the income statement versus the footnotes is irrelevant to the savvy investor. But then what is the harm of putting it on the income statement using some other means of valuation than Black-Scholes?

Thanks, sd, that was a great contribution. Like I said, I'm kinda agnostic on the issue; whether they are expensed or not seems less important to me than that they be fully, publicly, disclosed in as transparent a manner as possible, so people can place what value they will on them. Even if they were expensed, with all the problems that such an approach may have, would not people then be backing those numbers out when evaluating the company, if they believed it had the distortive effect that you mention?

SD's posts of 3:47 was interesting. While SD is right that Black-Scholes tends to overvalue the cost of providing employee stock options, financial economists have long recognized this issue and suggested alternatives that would be acceptable under FAS 123. While these alternative measures may not always accurately measure the true cost, they certainly are superior to recognizing no cost. While I'm loathed to paraphrase anything from Daniel Mitchell: "don't make the perfect the enemy of the good".

SD is also right about how rational investors know how to read financial footnotes, but then in an efficients market hypothesis world - why not put this expense on the income statement as opposed to a footnote?

The latest Harvard Business Review has, to my mind, an excellent case for the expensing of options and refutation of the arguments against. Sorry I can't find it on-line, but it made for great reading on the overnight flight from Tokyo.

Will: I think one of the great things about American capitalism is that it has been able to put the resources of typical Americans into the equity market more than any other system has. You may be right that people who don't read the footnotes shouldn't be investing in individual stocks, but do we want a system where very few people will invest this way?

And since the time to wade through obfuscatory footnotes is a very real expense for professional fund managers, an expense that is going to come out of the returns to fund investors, isn't this a penalty on all investors?

Surely it would now be possible to provide roll your own 'net income' figures with the investor choosing which lines to count in or out. A spreadsheet with the relevant lines.
That would solve one of the problems with many accounting issues, goodwill & merger accounting, pension liabilities, exceptional costs etc. It would also address the problems that varying apporaches cause, distorted time series, uneven comparisons.
One reason why footnotes are not a good solution is that frequently you need to look at competitors and going through a different treatment in the footnotes of each one is not practical.

Two further thoughts, one for, one against.

Paying employees, especially senior executives, in options does align their interests with those of investors as far as the price sensitivity of the options goes but incentivises against the investors interests as far as volatility sensitivity of the options goes. Even Black Scholes does not take this conflict of interests into account.

The counterpoint to that is that the investors cost is less when the investment returns less. In addition they do not have a cash cost and so do not disrupt the underlying business. That's a bit lame as a reason not to expense but it is an attempt to rationalise a common gut feeling that they are not a real expense.

Curt, I favor anything that produces more transparency. If that means expensing options, fine. If that means disclosing options in a uniform manner, but not necessarily as an expense, fine. I think the techies are overwrought in their protestations, but I also think that each speculative frenzy produces it's own favored manner of inducing people to invest unwisely, and that accounting rules can only accomplish so much.

Jason, companies give stock options because they act as a large inducement to employees, based upon what they might be worth in the future, often what they might be worth a long time into the future, which is a little different from giving an accurate assessment as to what they are worth today, for reasons that sd outlined.

sd,
If we can't use Black-Scholes because the volatility of a stock changes over time then we can't use beta because of its imperfections (after all isn't beta a measure of volatility of a stock which has no expiration and thus has a potentially longer lifespan than an employment option). And yet beta is widely used because it is useful and anyone using it should educate themselves as to its limitations.

Volatility for Black-Scholes is the expected volatility over the life of the option. If the expected volatility changes, the value of the option changes, but not the value of the original compensation.

Therefore, wouldn't it make more sense to use Black-Scholes or one of its alternatives and to have the method of pricing expressed in the footnotes. Wouldn't that be more accurate than a valuation of zero. As someone said, do not let perfect be the enemy of good.

"But the third common argument against expensing, the one least commonly made, is quite sound - namely, that there's no way to accurately measure the value of options."

Agree with Jason. If it's really true you can't accurately measure their value, then the company shouldn't be handing them out. "I just paid my employees - but I don't know how much it costs." It sounds ridiculous, no?

And yes, the value will change over time, and thus impact the p&l reported. But again, if companies don't want this variability, then they shouldn't give the damn things away. Because the variability is real, not imagined.

As I said in one of these discussions a while ago, investment banks have lots of options on their books and they measure their value. One technique is by using Totem (www.totem-risk.com), a clearing house which averages option prices from the investment banks every month, thereby providing a "consensus" value for OTC options which are not traded on public exchanges. Any company which wants its options to be valued need only contact Totem, pay a fee, and Totem would be happy to provide them consensus values.

Warren Buffett has been famously scornful of not accounting for options as expenses -- and of options in general -- and he's been able to use his influence on those companies in which Berkshire Hathaway has a large holding for the good.

"Perhaps Bishop Berkeley -- you may remember him as the philosopher who mused about trees falling in a forest when no one was around -- would believe that an expense unseen by an accountant does not exist. Charlie and I, however, have trouble being philosophical about unrecorded costs. When we consider investing in an option-issuing company, we make an appropriate downward adjustment to reported earnings, simply subtracting an amount equal to what the company could have realized by publicly selling options of like quantity and structure. Similarly, if we contemplate an acquisition, we include in our evaluation the cost of replacing any option plan. Then, if we make a deal, we promptly take that cost out of hiding...

"A few years ago we asked three questions in these pages to which we have not yet received an answer: 'If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?'"

(http://www.berkshirehathaway.com/letters/1998htm.html)

Are options still popular these days, either as an incentives policy or an accounting strategy? I'd suspect that for all but the biggest players and the few IPO-bound companies such as Google, a bear market would mitigate against them.

Dan Wrote:

"If we can't use Black-Scholes because the volatility of a stock
changes over time then we can't use beta because of its
imperfections (after all isn't beta a measure of volatility of a
stock which has no expiration and thus has a potentially
longer lifespan than an employment option). And yet beta is
widely used because it is useful and anyone using it should
educate themselves as to its limitations."

Indeed, beta is widely used, but not in the official financial statements. Beta is used by individual investors as a tool to help value a company based on the information in the financial statements. But the information in the financial statements themselves does not incorporate beta or any other modeling term. The proper analogy with beta, it seems to me, would be if some reform-minded types made the following argument: "Investors care about the value of a company, but that value is obscured in the detail of the financial statements. So lets require that companies report an NPV-based valuation of their own stock in the financial statements, using beta as a tool to calculate the cost of capital. While we agree that beta is not perfect, it is "widely used," and therefore it is acceptable to mandate its use to make an official valuation of a company." The problem with this argument, and, it seems to me, the problem with requiring the expensing of options, is that indivi
duals investors who are unschooled in the problems with valuation methods will take an officially reported number to be gospel truth. Yes, there are some uses of estimates in the financial statements (depreciation schedules, etc.), but as a rule its best to keep these estimates to a minimum, that way the individual investor is able to play with the numbers on the valuation of hard-to-value assets and liabilities himself or herself. It would more accurately reflect economic reality if we allowed companies to capitalize their R&D expenditures (as is done in Britain, I believe), or even their advertising expenditures (after all, brands with high awareness are some of the most valuable assets in the world - Coca Cola anyone?). But allowing such capitalizations would flood the financial statements with speculative estimates and model-based best guesses. The U.S. accounting system works (and yes, even in the Enron era, it usually works) not because it reflects reality spectacul
arly well, but because it takes a "just the facts" approach to the published financial statements, and lets the users of financial statements use the models and analytical tools that they find helpful in interpreting those facts.

"Volatility for Black-Scholes is the expected volatility over the
life of the option. If the expected volatility changes, the value
of the option changes, but not the value of the original
compensation."

But what volatility number do you use to calculate the original value of the option for the purposes of expensing it? The average volatility over the last 6 months? The last year? The last 5 years? The last x amount of time where x is equal to the duration of the option? The entire market-traded history of the company? The choice you make here is not trivial - it will greatly affect the reported value of the option. But none of these alternatives are clearly, unambiguously always better than the others.

"Therefore, wouldn't it make more sense to use Black-Scholes
or one of its alternatives and to have the method of pricing
expressed in the footnotes."

I think it would make more sense to require a Black-Scholes valuation of the options, but not put it in the income statements. The information would still be there, but the income statement would remain untainted by a speculative valuation model.

Another alternative, that in practice would work only for larger companies, would be to require that when companies give their employees options they sell identical option contracts on the open market, and to then let the market price of those contracts determine the value reported in the financial statements. This still wouldn't solve the problem, because high level employees can still affect the value of the underlying stock, while market buyers can't, but it at least makes things better.

I also like Jack's approach, posted at 5:29.

Jason McCullough Wrote (And Andrew Boucher Seconded):

>>"So can the economic value of employee stock options be
>>accurately measured? Hell no."

"If their worth can't be accurately measured, why are
companies so interested in handing them out?"

Just because its impossible to accurately value something doesn't mean its a worthless thing. I'm currently getting an MBA at U. Chicago. I'm pretty sure its quite valuable, as I've gotten an offer for a job that pays substantially more than my pre-MBA job. But can I say precisely how mush my education is worth? Absolutely not. To do that I would need accurate projections of my expected lifetime income with and without the MBA, plus some way of measuring the opportunity cost of my time. None of these numbers are readily available, yet I have no doubt that I made a wise decision in pursuing the degree.

Nick Sweeney Quoted The Sage of Omaha (tm):

"A few years ago we asked three questions in these pages to which we have not yet received an answer: 'If options aren't a form of compensation, what are they? If compensation isn't an expense, what is it? And, if expenses shouldn't go into the calculation of earnings, where in the world should they go?'"

OK, so ask these questions about the Coca Cola brand name: "If Coca Cola's brand name isn't an exclusive resource that generates massive economic profits, what is it? If an exclusive resources that generates massive economic profits isn't an asset, what is it? And if an asset shouldn't go on the balance sheet, where should it go?"

So are we ready to allow Coca Cola to put its brand name on its balance sheet? If I had to guess, I'd say it would have to go on at a value in the tens of billions of dollars, maybe close to $100 billion. After all, its nothing but a name and a logo scheme that somehow convinces people to buy one can of high-margin sugar water over another. The problem is, I would indeed have to guess to put Coca Cola's brand name on its balance sheet, because even though it is certainly of value, and even though there are ways of estimating its value, there are no ways of definitively valuing it. Now, the true economic value of other assets on the balance sheet can't be known, and we still include them in the financial statements, but that's generally because they were, at one time, purchased with cold hard cash, and we can use the purchase price as a basis for the balance sheet value.

I don't disagree that options are indeed a form of employee compensation, and that compensation is a business expense. Just as I hope all of the proponents of expensing options wouldn't disagree that well-known brand names, and full R&D pipelines, and well-developed experience curves in manufacturing, and talented senior management teams, are valuable economic resources, and economic resources are assets. But the question is: if we can't agree on a valuation metric for these things, should they be recorded on the financial statements? As with options, I would say no. You can put these "assets" on the balance sheet if you buy them in an arm's length transaction, but not if you develop them in-house, even if you can point to the exact amount of money you spent to develop them, and can provide comparables-based estimates of their useful life.

I'm all for expanding the quantity of information that companies should be made to disclose to shareholders, both about options and other things. But I don't think we should try to solve a corporate governance problem by putting a bunch of numbers in the income statements that are generated by formulae whose own underlying assumptions are violated in the process of generation.

I don't think the value of coca-cola's brand name is an outstanding liability, sd.

Jason McCullough Wrote:

"I don't think the value of coca-cola's brand name is an outstanding liability, sd."

Of course not, its an asset. Is it perhaps your position that employee stock options should be valued and run through the income statement as an expense, while intengible assets (like brand names) should not be capitalized and put on the balance sheet, because the former makes the company's financial position look worse, while the latter makes it look better? If so, then apparently you value the traditional accounting principle of Conservatism - that when there is uncertainty as to the value of something in the financial statements, the financial statements should reflect the most pessimistic interpretation of that uncertainty. Nothing wrong with that per se, but in this case it conflicts with the equally important traditional accounting principle of Measurability - that nothing should appear on the financial statements unless it can quantified precisely. I myself tend to think that the latter principle is more important, largely because there are so many other games that can be played with financial reporting to violate Conservatism that as a matter of practice the reader of financial statements is always wise to take any interpretation of ambiguity with a rather large grain of salt.

We lost the battle for Conservatism some time ago, which isn't the end of the world, so long as Measurability remains somewhat intact. If I have financial statements that violate Conservatism but not Measurability, then at least I can make my own judgements about their credibility and compare company to company. But if the financial statements adhere to neither Conservatism nor Measurability, then I might as well be reading a company press release.

Erring on the side of caution, after all, is still erring.

No, it's my position that coca-cola's brand name isn't a liability that's going to pop into existence out of (pretty much) nowhere in a few years. It's a bad analogy.

Expensing, disclosing - not in footnotes - along with liability estimated by various methods; pretty much anything is better than what's done right now.

People claim they are arguing that options should not be on the income statement but that is not an accurate statement of reality.

What they are really advocating is a valuation of these options at zero. The options valuation models are better than that.

Making option expenses for investors equal to option expenses for tax purposes will mitigate much of the moral hazard of valuing options. I hope we can all agree at least, that the income statement value should equal the tax purposes value.

The uncertainty of the value of options is minute compared with the uncertainty of goodwill. Goodwill and R&D expenses are also frequently capitalised.

The whole ant-expensing argument is a "Big Lie". It has been going on for years and until recently the sky didn't fall in so how can it be so egregiously wrong?

The inertia is also caused by peer pressure. If you are the only one who does it right, you will be dropped by all the automatic screens and you will have to work twice as hard.

There is also a whole employee benefits industry that would shrink if options wee taken out of its remit.

Two other negatives: The hidden divergence of interests between shareholders and executives caused by sensitivity to volatility of option values. Highly leveraged balance sheets and share buybacks all contribute evidence of the effects of such considerations.

Lost transparency. Reporting of shareholder transactions becomes less transparent. It is much easier to sell on options without investors knowing than it is shares. Witness Bernie Ebbers.