Adobe Takes Snapshot of Life With Option Expensing

The maker of photo-editing and document-sharing software revealed in a footnote in its annual report that 2002 net income would have shrunk to $6.6 million from its reported earnings of $191.4 million if it had used the fair-value method to figure the cost for employee stock options, according to a report by Reuters.

This latest revelation presents contrarian results to a recent Towers Perrin study that found stock option expensing has little effect on corporate bottom lines (See  Expensing Options Has Little Effect On Stock Price ).  Towers concluded from that study that the economic costs of using options had been known to investors before companies began showing profit & loss (P&L) expenses

Intrinsic Value

Like many other technology firms, Adobe relies heavily on stock options as a form of compensation, using the intrinsic value method to account for the value of the options.   Under this method, options are accounted for by taking the difference between the market price of the stock and the exercise price at which the employee may buy that stock.

Current US guidelines allow companies to choose between subtracting the expense of stock options from their income statements or disclosing their theoretical value in the footnotes of their financial statements.  With the exception of a handful of early volunteers and the approximately 130 recent coverts, most companies have opted to record the expenses in their footnotes (See  Fewer Companies Volunteer Stock Option Expenses ).

However, the International Accounting Standards Board (IASB)in November 2002 outlined a proposal that would require non-US companies to treat stock options as an expense by the year 2004 (See  IASB Releases Option Expensing Proposal ).  The splash of such a proposal has sent ripples across the pond as US accounting rulemakers, too, are considering such a move (See  FASB Speeds Up Option Disclosure Effective Date ).