Financial Management & Corporate Finance Case Study

Profitability Uncertainty Principle: The Case of eBay

OR

Abstract:
The widespread use of stock options as a means of employee compensation during the dot-com boom, prompted the Financial Accounting Standards Board (FASB) to review stock option expensing and the setting of a standard for reporting in the financial documents. While the debate has been raging in industry circles, many questions have taken root. Current accounting rules give companies the choice of reporting stock option expenses annually in the income statement or as a footnote in the annual report. Many companies including eBay report the cost as a footnote. But does this practice amount to a transfer of wealth to the employees at the expense of the shareholders?

Pedagogical Objectives:

• To understand the usage of stock options as a compensation tool
• To discuss the pros and cons of the expensing of stock options
• To discuss the accounting implications of expensing stock options.

Keywords : Expensing of stock options, Internet auctions, Finance Case Study, eBay, International Brotherhood of Electrical Workers Pension Fund, Margaret C (Meg) Whitman, Pierre M Omidyar, Financial Accounting Standards Board, Employee incentives, Accounting treatment of stock options, Executive compensation programme, arrangement, Sarbanes-Oxley Act, Initial public offering, Financial statements, Common stock, Stock analysis