Sir,
In the ongoing correspondence regarding whether or not, and how, employee options should be shown in companies' accounts as having a cost that is deducted from profits, little attention appears to have been paid to one relatively simple solution that has been advocated by some for many years.
Right now a company will generally write an open option to the employee, with the attendant implicit volatility for share price that would be caused by dilution after the options are exercised.
One alternative approach would be for the company, if it is large enough, to purchase the options for the employee from one of the many investment banks that daily write and trade such options, on one of the many options exchanges around the world.
This solution would indeed result in the cost of these options being clearly shown as a cost to be deducted from the profit and loss statement. It would also entirely eliminate any potential future dilution for the existing shareholders.
All that would be needed would be the insertion of a new requirement into GAAP rules. For any company whose share options are traded on any of the recognised options exchanges (which covers most companies where this controversy has arisen), the issuing of employee options would be permitted only when it was done in a way that the potential for future share price dilution, when the options are exercised, was eliminated.
This would clarify the matter for shareholders at a stroke and would also clarify the issue of the taxability of the options gift and at what value.
Unfortunately, it would also make it clear that the market value (ie cost) of such options (as usually issued, these are at-the-money and open for a term of up to seven years) was considerably higher than either the donor or recipient had realised.
This is, of course, one of the objectives of the campaign for such disclosure.
