Buffett's Fight to Restore Sanity
Stock option expense has a strange history. In fact, it was not until 2005 when it was mandated to be recorded as an actual expense. Until then, companies were free to choose if they wanted to record it or not.
Legendary investor, Warren Buffett, led the charge since the 1980?s against the frivolous use by executives of stock option compensation. He fiercely argued in almost every one of his annual reports why it should be an expense. Even since 2005 (once it was no longer allowed), Buffett continues to point out the absurdity of share-based compensation.
However, his advocating finally paid off and, in 2005, FASB issued a rule change.
Lastly, we go over the math on why stock compensation expense is so obviously an expense. While our example is very simple and would have technically fallen under the original 1972 rule. We simply want to show that theoretically issuing stock or paying in cash has the same effect on a company?s value. Logically then there is no difference between issuing stock and options, so it follows that the two are related.