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No. of Recommendations: 4
Don't wave away the granting of the option,

I will wave it away. Whether the transaction is recorded at the time the option is granted or when the option is exercised, the debit is the same: Employee compensation. There is a compensation expense here. There is a reasonable discussion about when that compensation should be recognized, but it needs to be recognized.

There *is* cash when the option is exercised.

Not always. There are plenty of employee stock options that have no exercise price. Far from all, of course, but the number is not immaterial. Further, the recording of the expense does not depend on whether there is a cash payment for the options. It does affect the amount, but not the fact that there is an expense that needs to be recognized. The addition of a cash exercise price just muddies the waters. It adds the potential for confusion. So I like to explain things in the simplest possible way first. Once you understand the simplest form of a transaction, you can add complexities in with less risk of confusion or obfuscation. A cash exercise price is an addition to the basic stock option transaction. So let's analyze and understand the situation in the most basic form to get a proper understanding.

Keep in mind here that I'm rebutting your claim that there is no expense because the granting of the option has no "cost" to the company. Whether there is a cost or not is irrelevant. Barter happens all of the time. The options undoubtedly have value. If they didn't have value, no employee would accept them as part of a compensation package. Likewise, the employee's time has no cost to the employee. That fact never enters the picture, either. When engaging in a barter transaction - basically any transaction that involves the mutual exchange of non-cash items of value - you need to come to some agreement as to the values involved to properly account for the transaction.

It's also important to note that the whole point of GAAP or IFRS financial statements is to provide investors - current and/or potential - consistent and reliable information about a company. I have no problems with a company using different financial statements for their own internal uses. Most of the time a company SHOULD use different financial statements internally. They have different needs than an outside investor.

--Peter
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