David Blitzer, managing director and chairman of the Index Committee at Standard & Poor's commented, "While the numbers seem large, the expense has always been there. Until the FASB's recent decision, much of it was reported in the footnotes, rather than the income statement. A change of 7% or 8% in estimated earnings for the S&P 500 is significant, especially if investors are not fully aware of what caused the change."
Standard & Poor's publishes data on As Reported earnings, operating earnings and Standard & Poor's Core Earnings. As Reported earnings are net income defined by Generally Accepted Accounting Principles (GAAP) excluding discontinued operations and extraordinary items. This is the longest earnings series available for US companies. The impact of options on earnings has been a focal point at Standard & Poor's for several years, and was factored as an expense into Standard & Poor's Core Earnings, an earnings measure introduced in 2001 to better reflect the true earnings of a company.
"Many companies have already started to expense option costs and most have announced their intent to initiate this practice," noted Blitzer. "Option expense is concentrated in the Information Technology Sector, but spans all sectors. Some companies have changed their compensation plans to reduce or even eliminate the use of options, replacing them with other forms of incentive or equity based compensation," he added.
Below are some working values for historical and estimated option expense:
| STANDARD & POOR'S INVESTMENT SERVICES | ||||
| S&P 500 ANNUAL OPTION EXPENSE | ||||
| Option expense was phased in from 1996 | ||||
| For 2003 and 2004 As Reported include current values being expensed | ||||
| Estimates in italics | ||||
| YEAR | ADJUSTED OPTION EXPENSE % OF AS REPORTED | AS REPORTED | OPTION EXPENSE NOT INCLUDED IN AS REPORTED | AS REPORTED LESS TOTAL OPTION EXPENSE |
| 2004 Estimate | 9.25% | 52.30 | -3.85 | 48.45 |
| 2003 | 10.58% | 48.73 | -4.18 | 44.55 |
| 2002 | 19.25% | 27.59 | -5.31 | 22.28 |
| 2001 | 21.52% | 24.69 | -5.31 | 19.38 |
| 2000 | 7.63% | 50.00 | -3.82 | 46.18 |
| 1999 | 5.20% | 48.17 | -2.50 | 45.67 |
| 1998 | 4.14% | 37.71 | -1.56 | 36.15 |
| 1997 | 2.81% | 39.72 | -1.12 | 38.60 |
| 1996 | 1.27% | 38.73 | -0.49 | 38.24 |
More information about option expensing, including an FAQ and sources for comment from Standard & Poor's, can be found on www.standardandpoors.com
About Standard & Poor's
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