Paint Yahoo! Red on Options Costs

For Yahoo! (YHOO Quote), how to account for employee stock options is a $483 million question.

As the company revealed in its annual report issued Friday, Yahoo!'s reported $42.8 million net profit for 2002 would have swung to a $440.1 million loss under the accounting treatment that a growing number of U.S. companies have adopted since mid-2002.

The difference once again illustrates the vast impact that different accounting procedures, including those covering options-based compensation expense, can have on a company's bottom line.

Yahoo!'s illustration of the consequences of various options accounting methods -- disclosed, like similar data from other companies, in a Securities and Exchange Commission-mandated footnote in its annual 10-K filing -- is emblematic of the issue's importance, says Patrick McGurn, senior vice president of advisory firm Institutional Shareholder Services.

"It's a good argument for getting this stuff out of the footnotes into the financial statement," says McGurn, "because every investor should be able to instantly see the impact of the cost of compensation on the financial statement and interpret the information as they see fit."

Yahoo! shares, trading near a 52-week high and more than double the level of their yearlong lows, fell 62 cents Monday to close at $23.35.

Increased Focus

Stock options accounting has drawn an increasing amount of attention over the past year. Whatever value options might have as a tool for democratically allowing employees to share in a company's success has been outweighed by options' guilt by association with highly compensated executives of poorly performing companies.

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