Capital One Financial Corp. filed an amended 2001 annual report Wednesday to correct an error it had made in calculating the value of stock options offered as employee compensation.
The error involved its accounting for five stock-based compensation plans the Falls Church, Va., company offers its employees and the effects the plans would have on its earnings per share if it had expensed the options since 1994.
According to Capital One's amended return, "the calculation is based on an accounting rule that requires pro forma information regarding net income and earnings per share, as if the recognition provisions of [a statement from the Financial Accounting Standards Board] were adopted for stock options granted subsequent to December 31, 1994."
Capital One calculated the value of the options using the commonly accepted Black-Sholes option-pricing model. The problem, according to a Capital One spokeswoman, was that the third party that did the calculation neglected to calculate the value for all options awarded since 1994, but only counted options awarded last year.
In previous annual reports the calculations were correct, she said.
Until last year Capital One performed the calculations itself and outsourced the work for the first time during the preparation of the 2001 report. The company has used the accounting firm Ernst & Young LLP to prepare its annual reports since its incorporation, but the spokeswoman said she did not know which outside company had performed the work on the stock option expensing.
The corrected calculation does not affect earnings or any substantive measure on the company's balance sheet, according to the spokeswoman. Capital One's actual reported net income for 2001 remains unchanged, at $642 million. The change affected only the pro forma earnings used in the footnote that calculated the value of the options. The amended report listed pro forma earnings after options of $540 million. The original annual report calculated the post-stock option pro forma earnings at $597 million.
In the wake of restated earnings from several other publicly traded companies, including Household International, Capital One's announcement sent its stock price down, but it recovered to close up 6.3%, to $31.05 a share.
The spokeswoman said the error in the stock option calculation was discovered when the company began a study of whether it should begin to expense the options it awards to employees.
Several big financial services companies, including American Express Co., Citigroup Inc., Bank One Corp., and J.P. Morgan Chase & Co., have announced recently that they will begin reporting stock options as expenses. Even though Capital One has not yet taken a stand on the issue, the spokeswoman said it was still under consideration and was a "reasonable" idea.
The flap over Capital One's stock option mixup helps underscore the complexity of expensing options, which are subject to such variables as changing stock prices, options that expire without being exercised, and option-vesting schedules.
To help clarify matters, the Financial Accounting Standards Board issued draft guidelines this week offering three proposed methods for companies that wish to expense options. Companies may choose one of the proposed methods or use one of their own, as long as they explain it in a footnote.
