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AMB Begins Expensing Stock Options

Accounting: Proponents say omitting such grants understates a firm's compensation costs.

July 11, 2002|From Bloomberg News

AMB Property Corp., the second-biggest U.S. warehouse owner, has started accounting for the estimated market value of stock options issued to employees and executives as an operating expense.

AMB, a San Francisco-based real estate investment trust, is one of the few large firms to take that step, which has been urged by many shareholder activists who argue that companies are hiding the true cost of options.

Critics say omitting options from an income statement obscures a transfer of wealth from shareholders to management and employees and understates compensation costs. Each option granted to an employee cuts the value of shares already held by investors.

U.S. accounting rules require only an estimate of option costs to be included in footnotes to earnings reports. Only two companies in the Standard & Poor's 500 index--Boeing Co. and Winn-Dixie Stores Inc.--currently list options as an expense.

"The current environment is forcing companies to be more conservative in their accounting, but expensing stock options is really going from one extreme to another," said David Zion, tax and accounting analyst at Credit Suisse First Boston. Other companies "will be very slow to do this."

Options issued after Jan. 1 are covered by the change, AMB said Monday while releasing second-quarter results. Option costs will reduce 2002 profit by 1 cent a share, the company said.

"We believe in expensing stock options and have been fighting for it for some time," said Patrick Connor, spokesman for TIAA-CREF, the second-largest manager of retirement plans. "We think this issue may now be going our way." Some members of Congress have proposed forcing companies to expense options. Technology firms have fought the idea, arguing that options are difficult to value.

But a primary reason for the opposition is that expensing options could significantly cut earnings for firms that have issued large numbers of options. The technology industry has long used options as a principal form of compensation.

The decline in profits among companies in the S&P 500 would have been steeper last year--21% instead of 18%--had options been expensed, according to a study by brokerage Lehman Bros.

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