Kale-ESO[1] - To Expense or Not to Expense, That is the...

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To Expense or Not to Expense, That is the Question – Accounting for Employee Stock Options Jayant R. Kale, Department of Finance CERMAS Teach-in , Sept. 17, 2002
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Do Not Expense: Reason 1 …while stock options have value to the executives, …, they cost the corporation nothing. They are never a cost to the company and, therefore, should never be recorded as a cost on the income statement. (Harvey Golub, former Chairman and CEO of American express.)
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Are ESOs Costly to the Firm? • If the firm sold that option in the market today, will it receive a non-zero price? • When the executive exercises the option at say $10 when the prevailing price in the market is $40, are the shareholders giving up anything? • Yes and Yes. ESOs are costly.
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Do Not Expense: Reason 2 • The high-tech industry managers say that if forced to expense options, they will not be able to grant as many options and will not be able to recruit and keep talented employees.
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For Expensing Options Companies that do it (expense ESOs) are good companies; companies that don’t have something to
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This note was uploaded on 06/09/2011 for the course BUS 421 taught by Professor Karel during the Spring '11 term at The University of British Columbia.

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Kale-ESO[1] - To Expense or Not to Expense, That is the...

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