Circuit City ( CC) will expense stock options beginning with its fourth-quarter report, the electronics retailer announced Monday. Options expenses would have swelled Circuit City's net loss during the first nine months of this fiscal year by about 6 cents a share. For the previous fiscal year, options expenses would have cut the company's net earnings by about 11 cents a share. The company did not estimate how much options expenses cost it in its just-completed fourth quarter. Circuit City plans to release its latest quarter's report on Wednesday. Circuit City made the announcement Monday to allow analysts and investors time to rework their models prior to the company's earnings report, said company spokesman Jim Babb. "Adopting the rule now allows investors to better understand our results," Babb said. "This will make comparisons easier." Babb didn't know why Circuit City didn't adopt options expensing earlier. Current accounting rules allow companies to choose whether or not to include options expenses in their income statements. Many companies have chosen to exclude such costs, arguing that they are a noncash expense that muddles their real results. But options and options expensing have become increasingly controversial following the accounting scandals of recent years. Many governance critics have blamed stock options for the aggressive accounting at Enron, Worldcom and other companies. Stock options typically have value only if a company's stock rises. Because they also have a limited shelf life, governance experts have argued that their use encourages executives to take short-sighted, risky, and sometimes illegal steps to boost share prices. Meanwhile, by not expensing stock options, companies have little incentive to control their use. What often happens at such companies is that options exercises can overly dilute shareholder value, critics charge.
In recent years, a number of Fortune 500 companies such as Microsoft ( MSFT) and Amazon.com ( MSFT) have voluntarily chosen to expense stock options. Meanwhile, in recent weeks, shareholders at
PeopleSoft ( PSFT) and Hewlett-Packard ( HPQ) have voted to urge company managers to expense options. The issue is expected to come to conclusion later this year. The Financial Accounting Standards Board plans to release a proposal later this week that would require all public companies to expense stock options. FASB expects to have a final rule in place by the end of the year. In the first nine months of Circuit City's 2004 fiscal year, the company would have lost $178.83 million, or about 87 cents a share, including stock options expenses. The company's previously reported loss for that period was $166.70 million, or 81 cents a share. In fiscal 2003, Circuit City would have earned $82.26 million, or 29 cents a share, if it included options expenses. Previously, the company reported earnings of $106.08 million, or 40 cents a share for fiscal 2003. Prior to the company's announcement, analysts surveyed by Thomson First Call had projected that Circuit City earned 36 cents a share in its fourth quarter on $3.25 billion in sales. Best Buy ( BBY), Circuit City's chief competitor, does not expense stock options. Best Buy representatives did not immediately return calls seeking comment. Circuit City shares were recently up 1 cent, or 0.1%, to $10.69.