Accounting & Tax

Companies Slow to Expense Options

Fully 58 percent of companies plan to include options expenses in their earnings guidance, but many of those will provide both an earnings-guidance...
Stephen TaubDecember 12, 2005

Fully 65 percent of public companies have not begun to comply with Statement 123R, the Financial Accounting Standards Board’s revised rule on stock-option expensing, according to a survey of 386 companies by Thomson Financial.

Most public companies are required to expense options for fiscal years beginning after June 15, 2005; companies that operate on a calendar basis must begin expensing options by the March 31, 2006, quarter.

Many seem to be waiting as long as possible: 86 percent of surveyed health-care companies, and 76 percent of technology companies, have not begun expensing stock options. “Health-care and technology firms have traditionally been the biggest issuers of employee stock options and would therefore experience the biggest hits to their bottom lines once options are expensed,” noted Thomson.

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According to Thomson’s survey, 64 percent of companies plan to use the Black-Scholes model to calculate options expenses; only 10 percent plan to use a lattice model. The primary reasons for choosing Black-Scholes were ease of use (69 percent), a perception that it is the most widely used model (60 percent), and less expensive to implement (43 percent).

Fully 58 percent of companies plan to include options expenses in their earnings guidance. However, nearly half that number also plan to provide both an earnings-guidance number that includes options expenses and one that does not.

Last month, Standard & Poor’s announced that it would include options expenses in operating and as-reported earnings for its U.S. indices, including the S&P 500. “The ability to compare costs across company and sector levels is vital to the investing community,” said market equity analyst Howard Silverblatt, in a statement.

For its part, Thomson has stated that it will go along with the majority when it reports consensus earnings estimates through its First Call service; if a majority of analysts supply earnings estimates without counting the expense of stock options, First Call will highlight the unexpensed number. Thomson recently added that it also will include the “minority” data in its database.

A final interesting note: For all the hubbub, the Thomson report found that 67 percent of companies have not seen or do not expect to see a negative impact on their stock price as a result of expensing options.