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Strategies & Market Trends : Zeev's Turnips - No Politics
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To: Night Trader who wrote (30681)2/18/2002 8:40:43 AM
From: Boca_PETE  Read Replies (1) of 99280
 
martin knight - Company B deserves a higher valuation because it was clever enough to get its shareholders to directly pay the stock option portion of its executive compensation. The different economics (ie. cash flows) of company A vs. company B deserve different accounting.

- When company A pays conventional salary expense, Cash (assets) leaves the company and net assets (stockholders' equity) are reduced.

- When company B gives employees stock options, no (assets) leave the company and net assets (stockholders' equity) remains the same. Only the outstanding shares are increased when figuring per share income on a diluted basis.

The accounting proof is in the convoluted entries required by SFAS 123 when companies "elect" to book stock option expense for granted stock options. The entries are clearly forced by those determined to book an expense for stock options despite the real economics of the issue. In the end over time, you end up with a reclassification from one stockholder equity account to another because no assets left the company. In fact, assets came into the company in the amount of the option exercise price determined at date of option grant.

Passions run strong on the stock option issue. You can see that from the responses to my initial post. Hopefully we can at least agree that many companies fought the proposal based on their feeling the proposed accounting was wrong and inconsistent with the real economics, not necessarily because of material impact on company net income. I have never seen anyone refute the above description of the economics of stock options because the economics (cash flows) are an undeniable fact. That's why it took an act of Congress to stop that train.

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