what is the best way to account for the dilution of stock options. I know the accounting rules account for it in a certain way, but should an analyst add to this?
GAAP requires that assumptions be made about the exercise of the options based upon the strike vs. market price at the time of reporting. Addition to this would be subjective based upon your assesment of the likelihood of the stock pricing rising to the point where many more options would become in the money. It is also worth noting that firms are allowed to expense the difference between stike and exercise in the period that the option is exercised, which may produce a distortion of taxes payable in CFO on the CF statement due to a reduction of the taxes payable on the balance sheet. This addition to CFO should be removed if it can be identified.