abh3vt you raise some good points regarding options and this is definitely not a black and white issue.
I do agree with the theory that stock options are a form of employee compensation. Thus, I agree that they should be recorded as an expense.
I look at these grants as an in kind transaction as if you issued the options to the public and used the proceeds to pay your employees. Therefore, I have no problem with them being expensed and not reversed if they are not exercised.
The complication for me is that in reality you are simply reclassify the value of the options in stockholders equity from retained earnings to contributed capital. If you assume those options never get exercised their impact to me as a shareholder on the intrinsic value of my shares is zero. If they do get exercised they essentially reduce my share of the intrinsic value of the Company by increasing the denominator.
To make a long story short, despite my agreement that they are a legitimate in kind expense, I do back out the expense aspect when valuing earnings because the expense does not decrease stockholders equity. I do, however, factor in their dilution.
