By Alison Rice. With the crash of WorldCom and Enron, the true cost of stock options has become a hot topic on the business pages. Such information isn't a mystery; public companies must disclose the information in their annual reports.
But investors, angered by what they see as accounting deception, want more than a footnote. They want stock options, sometimes offered as part of an employee's compensation package, treated as an expense when calculating earnings.
That could be a painful experience for many companies. If the companies on the S&P 500 had been required to expense options, last year's profits would have been 19 percent lower overall than reported.
For builders, though, the impact is relatively small, ranging from essentially no impact for K. Hovnanian last year to 6.4 percent for Centex Corp. in its fiscal 2002. "Home builders use completed contracts [to determine revenues], which is a clean method of accounting," says Chelsey Ingenito, an analyst with Merrill Lynch, which released a report on the issue in July. "For the most part, home builders and their statements are pretty clean."
If the impact is so minimal, why don't builders just do it? The answer is consistency, both in calculation (currently, two methods can be used to determine option expenses) and in implementation by companies and analysts. "If it's not done uniformly, it makes it more difficult than it was before," Ingenito says. "Someone needs to come out and say, 'This is going to be the norm.'"
But Centex Corp., which annually grants options to 125 directors, executives, and senior managers, has decided to take the leap. It will begin expensing options next year, joining fellow Fortune 500 companies such as GE and Coca-Cola in greater financial transparency.