David M. Katz, CFO.com | US
January 10, 2007

Work

Work for us for 4 years, and we will give you $10 million in options.

Work for us for 3 years and 11 months and we will give you no options.

What is the best way to book the cost?
Is it all at once, once the 4 year mark is reached, or is it $2.5 million per year, with the possibility of a big reversal if the 4 year mark is not reached?

Posted by Roland Cycan | Jan 11, 2007 9:37 AM ET

Matching of Revenues Generated and Expenses Incurred

The SEC requirement of option compensation expense recognition over the vesting period of the option is more logical than instantaneous grant date compensation expense recognition. This arises due to the logic of the matching principle. The option is not granted for nothing. Rather, it is granted in return for services rendered by the option recipient and the associated future revenues or expense reductions generated by the recipient. Consider, by analogy, property, plant, and equipment as long lived assets. The cost of these assets are amortized over their estimated useful lives such that the expense is matched to the revenues they purportedly generate while in operation. Would it make sense to immediately expense capital expenditures if they have a future benefit in the form of revenue generation through use? No. That is why we employ the matching principle. Similarly, there is a future benefit of the employee who works to generate revenues governed by the employment contract that delineates compensation, be it monetary or non-monetary options, that is logically recognized after the economic rent of labour has been provided by said employee through the vesting period and beyond.

Posted by David Newman | Jan 10, 2007 9:35 PM ET