Putting Fat Cats on a Capital Starvation Diet

FASB Will Carry the Day

The Financial Accounting Standards Board's move to expense stock options is a fait accompli. As I stated in a prior column, "what gets measured gets controlled." Because companies recognize that option expense will soon be "measured" (reported in the income statement, not in an obscure footnote), the issuance of options is already being "controlled."

Microsoft (MSFT Quote), Apple (AAPL Quote), Yahoo! (YHOO Quote), Dell (DELL Quote) and Amazon (AMZN Quote), among many others, have all made moves to significantly curtail option issuance. Still, some companies continue to fight for the status quo. For example, Intel (INTC Quote) lobbied hard against a shareholder proposal to expense options (a nonbinding proposal) before barely winning the vote.

Intel remains steadfast against FASB's plan. CFO Andy Bryant said about options: "Cash doesn't change, revenue doesn't change, the ability to invest doesn't change. What changes is future profits are spread more broadly." However, his statement doesn't hold up to scrutiny:

• 'Cash doesn't change': This is misleading. Either (1) cash is depleted because the company purchases stock on the open market to cover dilution due to options, or (2) if the company doesn't buy back stock, shareholders' pro rata claim on cash is diminished because there are more shares outstanding.

• '... revenue doesn't change': Again, either the company must use shareholder property (cash) to purchase shares on the open market to prevent dilution, or a shareholder's ratable share of revenue declines with more share issuance.

A cornerstone of accounting is comparability. Income statements in Andy Bryant's world aren't worth much, because he doesn't want to include option expense on the income statement. Because many companies now expense options or don't issue them at all, comparability of earnings is difficult, if not impossible, for many users of financial statements.

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