In December, the Financial Accounting Standards Board (FASB), with the backing of the government establishment, ordered companies to treat the options granted to employees as an expense, valuing them according to arcane formulas that were created for entirely different purposes, and that fit the options situation quite badly.

Some of us argued that this is a seriously bad idea, that the techniques for valuing options are so screwy that treating them as expenses will degrade the quality of information; that options serve a particularly important role in tech companies, where they are a mechanism of cooperation among the providers of financial capital and the providers of intellectual capital; that FASB is fiddling with an ecosystem that it simply does not understand ("green eyeshade types" and "bean counters" are not compliments); and that the changes are being promoted by people who are hostile to the stock options, for their own selfish reasons, and want to discourage their use.

(See these prior posts and sources they cite: More on Stock Options; Prime Numbers; FASB Rolls On).

Yesterday, WSJ noted that mutual fund managers and other consumers of information are instructing analysts that they want their numbers according to the financial equivalent of the Latin Mass -- with the existence of options disclosed, but not deducted from earnings.

Today, it noted that

[A] study [of] 340 companies in technology, media, telecommunications, life sciences and other industries, found that 75% of respondents already had cut back, or were preparing to cut back, on the number of options granted. . . . . Among those reducing stock options, 45% said reductions would occur below management level. However, 91% of respondents said they hadn't made any changes to option-grant eligibility for senior executives.

So what do you know, the new-style information is not as useful, and it is having a bad effect on tech companies. And the evils of this nonsense have hardly even begun to work their way through the system.

Robert Conquest, the fine historian of the Russian purges, received much disrespect until the information that became available after the fall of the Soviet Empire confirmed his horrifying calculations. It was suggested that he entitle his next book: We Told You So, You F*****g Fools.

posted by James DeLong @ 9:53 AM | Accounting

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