Dialogue
FROM: NOV-DEC 2003 ISSUE
Controversial Options
Derek Strocher's article "Options to Expense" ( CGA Magazine,May-June 2003) shows why the matter will, and in my view, should remain controversial.
Strocher draws the familiar analogy between Company A, which pays its employees in cash, and Company B, which issues stock options instead. He then states that the companies "are actually in identical financial shape" and implies that if Company B's stock options are not expensed, its higher reported earnings are a distortion.
I submit that the analogy is flawed. My reading leads me to wonder whether financial analysts and accounting standards setters have forgotten their basic double-entry bookkeeping since few if any of the articles on this subject address the credit side of the entry.
The basic flaw in the case for expensing stock options is that it assumes that the interests of a corporation are identical with the aggregate of the interests of its shareholders at a given time. That is true neither in law nor in reality. Why should it be true in accounting? The fact is that the cost of stock options is borne not by the shareholders at the time the options are issued or when they are exercised. The cost is borne by those who acquire the shares after the employees exercise the options (or the employees themselves, if they retain the shares). Whether that cost turns out to be an asset or an expense to the acquirers is a question of fact that will have different answers in different cases.
Strocher rightly points out that the measurement issue is even more complex than the question of principle. The proposed methods focus on valuing the options in the abstract, based on perceived future benefits to the option holders. They are not so much methods of measurement as attempts to predict the future. Defenders say this is nothing new, that accountants make estimates and forecasts all the time. True enough, but in the context of financial statements, the process usually works the other way. Faced with a known historical cost, we write an asset down or write it off entirely when current knowledge suggests that its likely future benefits no longer justify its stated value.
Strocher's proposed solution has merit because it is rooted in the historical cost model accountants have followed for more than half a millennium: equating the value of what is given up with that of what is gained.
Keith A. Jackson, CGA, CFP
Oshawa, Ontario
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Pure Inspiration
I would like to take this opportunity to thank CGA Magazine for the article on Jean Aitken, CGA, in the May-June 2003 issue.
I am currently enrolled in the CGA program in Alberta. My goal once I've successfully completed the program is to travel and work abroad in many different places. I see Jean's story as a motivation for me to keep going and to know that I can obtain my dream. I am also doing my bachelors degree with Athabasca University and, after reading this article, I feel I have connected with someone I've never met.
My résumé may not be impressive like Jean's, but one day I hope it will be.
Thanks again.
Catrina Moore,
Student in the CGA Program of Professional Studies
Calgary, Alberta
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