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Accounting for Stock Options Todays accounting rules for stock options make up the most powerful tool available for manipulating earnings Stock options accounting is the 800-pound gorilla lurking in every discussion of accounting reform taking place right now Everyone knows that the issue is too big to ignore yet everyone worries that a serious fix would take down the entire technology sector and perhaps more than that According to current accounting rules companies that issue millions of shares of stock options each year dont have to charge a penny in expenses against their earnings In 1993 the Financial Accounting Standards Board proposed rules on how companies should value the options at the time they were issued and how they should subtract them from earnings After a bitter fight that included high-level congressional lobbying against the rules the Financial Accounting Standards Board withdrew a key part of its proposal Companies would not have to deduct the cost of options from their reported earnings unless they wanted to do so which took away the main solution to the problem Instead they could provide a footnote or a note at the bottom to their financial statements stating what earnings per share would have been if the cost of options actually had been deducted from earnings Today that is about the only place investors can find the true earnings per share numbers for companies if they care to go searching for them Big technology heavyweights like Intel Cisco eBay and Microsoft would be largely affected if the rules were to change For example in 2000 Intel reported earnings of 173 a share Pro forma earnings after deducting for the cost of options came to 140 a share according to the companys 10-K filed with the Securities and Exchange Commission At Cisco Systems charging the cost of options against earnings would have increased the loss per share in the fiscal year that ended in July 2001 to 38
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