Stock Options – US profits questioned

Accounting procedures for employee stock options came under fire last week after a report said billions of dollars committed to management stock options did not appear on the profit & loss accounts of major US corporations.

Microsoft’s $2.3bn (#1.4bn) 1996 profit, for example, would become a $10.2bn loss, according to researcher Smithers & Co. The company investigated the annual results of 100 companies and deducted the cost of buying share options granted to employees from the company’s profit for the year they were granted.

The report estimated more than 10% of all US shares were earmarked for company stock options schemes, worth $70bn – roughly 1% of US gross domestic product.

The report’s authors included Robson Rhodes corporate finance manager John Emerson, who plans to conduct a similar survey of FTSE-100 companies. ‘It’s a contentious issue in both the US and the UK, but the impact is likely to be less significant on this side of the Atlantic,’ said Emerson.

‘Our view is that stock options awarded as part of an employee’s compensation pac- kage are a cost on the company. One analyst told us the effect of options meant he would be buying 100% of the downside, but only 80% of the upside,’ he added.

US accounting standards only require companies to include share option costs in explanatory notes. In the UK, the Accounting Standards Board requires companies to recognise the difference in the value of shares and the exercise price in the p&l account at the time of the grant.

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