Options Debate Explodes Anew With FASB Plan

For most companies, the impact of the rule has already been factored in, Blitzer said, suggesting the only real casualties are likely to be the handful of companies which, after expensing options, see quarterly profits turn into losses.

Still, the new rule on options expensing is likely to push cash flow trends to the fore.

"It's not so much that companies will be providing brand new information, but I believe it will significantly raise people's awareness of the fact that cash flows that normally accrue to shareholders or bondholders or go towards capital spending are in fact committed to offsetting dilution," said Vadim Zlotnikov, chief strategist at Sanford Bernstein. (Employee exercising of stock options increases a firm's total shares outstanding; companies often buy back shares to offset such dilution, but that absorbs money that otherwise could have been used to pay a dividend or be reinvested in the company's core business.)

Noting that corporate cash balances as a percentage of assets are the highest they've been since World War II, Zlotnikov predicted "the use of corporate cash flows and the disciplined use of cash flow" will be the "single most important controversy" over the next few years.

Todd Ahlsten, manager of the (PRBLX Quote)Parnassus Equity Income fund, said his firm already pays careful attention to whether a given company's stock buyback plan actually reduces its net shares outstanding, or merely offsets the dilution from generous stock options grants.

For example, Parnassus found that Intel (INTC Quote) bought back a net $16.9 billion in stock between 1999 and 2003, equivalent to 9.3% of the company based on the current share count. Yet the company's shares outstanding declined only 2.7% because it had to pay up to offset options dilution.

The issue of expensing options has come to the forefront in recent years following the accounting scandals at Enron, Worldcom and other companies. Many governance critics have blamed stock options for the aggressive or illegal accounting that precipitated such fiascos. Because options only have value if a firm's stock rises and have a limited shelf life, governance experts argue their use encourages executives to take short-sighted, risky, and sometimes illicit steps to boost share prices.