New rules make options expensive

NEW YORK – Wouldn’t it be nice if you could say a whole category of your regular expenses, such as your utility bills, don’t really count? If you could convince someone that those expenses, even though they showed up in your bank statement, should be added back every three months?

That’s what some companies are trying to do when they ask investors to ignore expenses such as employee stock options when they report their quarterly earnings.

Don’t buy it. Regard with suspicion the pro-forma or adjusted earnings numbers that emerge after “certain expenses” are stripped away.

Under new rules, companies whose fiscal years began on or after June 15 must record their employee stock options as an expense. This is a change corporations, especially in the technology business, have fought since 1993.

Why? Because employee stock options are expensive. The options, which give workers the right to buy shares of the company’s stock, usually well below the market price, were the fuel of the go-go Internet and telecom boom. The best part: Options were free, at least as far as reported net income was concerned, since options weren’t counted as an expense.

With the accounting change, options’ impact on the bottom line will be clear. And weighty.

If options levels in the tech sector stay the same, UBS predicts options expense will lower earnings per share for S&P 500 technology companies by 15 to 20 percent on an ongoing basis.