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No. of Recommendations: 1
I will wave it away.

Then you are distorting the whole issue. The point of the issue with GAAP is deducting as an expense the *granting* of the option, whether or not is is ever exercised. At that point, the company has spent no money, taken in no money, and the shareholders are not impacted since that only happens when the options are exercised.

There is a compensation expense here.

Why? There is an impact on shareholders, but the company spends no money granting the option and takes in money when the option is exercised.

There are plenty of employee stock options that have no exercise price.

Got a source? I have never seen such a thing. Even options granted to founding partners when the company is worth nothing have a nominal exercise price. Gotten those, I have.

You seem to be missing two points, which are clarified by being clear about treating the granting and the exercise as two separate transactions. In the grant, no cash goes anywhere. The grant is a grant of a right to do something. a is an obligation, but the obligation is to issue paper, not cash. The exercise, if anything, brings cash *in* to the company.

The point of option grants is that it is something the company can give away without incurring current or future costs. So, it is good for the company, because it costs nothing, and good for the employee because there is the *potential* that a small cash outlay to exercise the option will produce shares whose value is well over the cost. None of this has anything to do with the profit and loss of the company's operation. It seems likely that someplace along the line someone decided, like you, that somehow this transaction should be reflected in the company's report and then ended up with the current rule. For old established companies, the rule has a trivial impact on the P&L; but, for a high tech young company which offers a lot of options, it is a massive distortion of the P&L.

And, yes, I am a big fan of the idea of GAAP and have some history of pointing out to my customers that there was a right and wrong way to handle certain types of transactions ... in some cases in opposition to the initial position of their accountants ... note the "initial" ... I didn't lose any of these.

The whole point of GAAP is to create a uniform way of comparing company financials so that one knew that one was looking at an equivalent statement and not some statement where strange handling was distorting key elements. Great idea, but if one creates a rule that systematically punishes companies that do something like use options as a part of their compensation so that the P&L GAAP number is a massive distortion of their actual profit and loss from operations, then there is an important reason to also repot non-GAAP numbers and for us as investors to pay attention to those numbers.
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