2004 Profit Would Have Been Cut 38% by Options, Apple Admits

Apple Computeris diluted earnings per share for the 2004 fiscal year would have been cut by 38%, or US27 cents, had it expensed the cost of employee stock options at their fair-market value, the company acknowledged in its annual report released Friday.

Apple said its 2004 earnings per share was 71 cents a share, but would have been 44 cents had it used the different method to figure the cost for employee stock options. Stock options give employees the right to buy the companyis stock at a set price in the future.

Apple measures expense for its employee stock-based compensation plans using the intrinsic value method, whereby it accounts for options by taking the difference between the market price of the stock and the exercise price at which the employee may buy that stock. Under the controversial accounting procedure, compensation expenses are not recognized in Appleis consolidated statements of operations.

The International Accounting Standards Board and many economists favor the fair-value accounting method, which attempts to reflect what the options would cost to buy if they were available on the traded market. Apple regards fair-value pricing of stock options as unworkable. In March of 2003, then Apple chief financial officer Fred Anderson defended his companyis practice by saying, "Option pricing in a real market reflects a broad range of subjective factors that are subject to constant change. The markets for traded options do not rely solely on blind adherence to the results of complex mathematical models as suggested by the FASB?s position."

Mr. Anderson argued that existing options pricing models, such as the Black-Scholes option pricing model, are subject to a high degree of judgment and variability, which makes them subject to manipulation. "Assessing the expected life of options and the expected volatility over that life is virtually impossible to do with any degree of certainty," he said. Apple estimated that the Black-Scholes option pricing model overstates the value of employee stock options by a factor of two to three times.