exercised.Consequently,theexpensesassociatedwithoptions
are considered only when they are exercised.
The tax effect of options has mirrored the accounting
treatment. Firms that issue options do not face any tax
consequencesintheyearinwhichtheymaketheissue.When
theoptionsareexercised,however,theyareallowedtotreat
thedifferencebetweenthestockpriceandtheexerciseprice
as a tax-deductible expense.
Asaconsequenceofthisaccountingandtaxtreatment,young
andriskycompanieswereabletograntmillionsoflong-term
options of considerable value to their employees while
recordingnoexpensesforthegrants.Atthesametime,they
were able to defer their taxdeduction forthis expenseto
futureyears,whentheypresumablywouldreceivelargertax
benefits.
The Debate about Expensing Options
Asnotedearlier,thedebateaboutwhethertoexpenseoptions
hasbeengoingonformorethanadecade.Sincewedon’tsee
any issues worth debating on thefundamental question of
whetheremployeeoptionsareoperatingexpenses,itisworth
lookingatsixoftheargumentsthathavebeenposedbythose
who have opposed its expensing:
1.Optiongrantsdonotaffectcurrentearningsanditispure
speculation as to whether theywill affect future earnings.
This argument is predicated on the uncertainty associated
withwhetheroptionswillhaveexercisevalueinthefuture.
Thecounterargumentisthatthefirmsgrantingtheseoptions
and the employees receiving them believe that they have