By curtailing the options, the incentive to inflate net income and earning per share would have been reduced. Several arguments have been made, both pro and con, regarding this issue. Following is a summary of the key arguments on both sides.
Post-Enron Pension Reform Aims to Educate – and Protect – Employees
At the time the option is exercised, the employee must pay for the shares received. As to the improved corporate governance argument for the change, the Securities and Exchange Commission certainly has just cause to seek improvements in corporate governance. However, there are ways of accomplishing this without creating controversial accounting requirements and penalizing employees below the top level of management.
There are more effective ways to accomplish this than the FASB proposal on expensing options. For additional views on the subject of expensing stock options, please refer to the following Wall Street Journal articles:. Web services will enable organizations to integrate their information, applications, workflows, and customer transactions in more versatile web environments. No longer does one plus one always equal two — in a given reporting period anyway.
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There are two issues surrounding the recording of an expense when an option is awarded: Does the expensing provide a level playing field in accounting for management compensation? Would the recording of an expense when an option is awarded improve corporate governance? Pros Expensing options will provide a level playing field so that companies that use cash bonuses and companies that use stock options each have an expense on the income statement. It will improve corporate governance by reducing or eliminating incentives to inflate income and earnings per share.
Cons The playing field is already level. A company using cash bonuses as management incentive compensation has a reduction in net income and a resultant reduction in earnings per share. When a stock option has been awarded and the strike price is in the money, the additional shares become outstanding for purposes of calculating earnings per share. Since earnings per share is calculated by dividing net income by weighted average shares outstanding, as the shares outstanding increase, the earnings per share decrease. To require a company to record an expense for the option, and subsequently increase the shares outstanding is a double hit to earnings per share.
Regarding improved corporate governance, it is difficult to believe that the management or the Board of Directors of Enron would have limited the number of options simply because of the requirement to record an expense.
The Benefits and Value of Stock Options
Such is the nature of recording an expense when an option is awarded. This is an accounting entry with no cash impact. This would likely lead to companies including a pro forma income statement which excluded the option expense. Hi-tech companies have traditionally issued options to multiple levels of employees with two purposes in mind: attract high quality employees to the company; and motivate workers at all levels.
If hi-tech companies were required to record an expense at the time options are granted, many employees at all levels would most likely lose the options. This stock must be held for two years before it can be sold.
Therefore, under her version of the facts, the The requirement that an employee be employed by the parent company in order to receive stock options of the parent may have been the requirement of See, e. Plaintiffs also claim that the Committees failed in their duty to investigate whether the investment options were These Claimants, thus, "purchased" the stock options with their labor.
The Court noted that: "[w]hile the Claimants do not deny that the value of the employee stock options may increase, they assume that there is a min Shelby testified that he sold shares of his Enron stock in because he was uncomfortable with being in the stock market and that he relied on his friend David Berberian's advice as to when to sell. Moreover, in the su Shelby conducted four trades in June and July of He sold shares of Enron stock on June 26, Ju Moreover, Shelby contends that he exercised these Outside Directors further argue that under Lead Plaintiff's own criteria, as If an insider sells when the stock price is not at a high point or after, rather than before, he has delivered negative news about the corporation that causes the stock price to Our algorithms sense that you may get better results by trying out the same excerpt in our CaseIQ TM interface.
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What Options Can Do for You
LEE v. Enron Corp. Ubs Painewebber, Inc. Texas, Houston Division. In re MF Global Holdings SMALL v. Court: Supreme Court of California.
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