Huey,
Thanks for providing that article. For those who haven't seriously considered the issues in the past, I believe it does a great job of making them crystal clear, though not with the precise level of detail you offered long ago.
What do you think about McCain's proposed bill?
I don't pretend to understand the nuances of the bill or existing laws and accounting practices, but I believe a phrase in the first statement of that article is a little misleading: moves to repeal a tax law that allows companies to recognize tax benefits for stock options while not recognizing them as operating expenses.
If I understand the major issues correctly, the tax law doesn't have anything to do with whether or not operating expenses are recognized. It has only to do with the tax benefit currently allowed by the IRS. I'd appreciate it if someone more knowledgeable than me could confirm or correct my impression.
The basic assumption is probably that far fewer employee options would be issued if the employer no longer receives the tax benefit. With fewer options issued, there would be fewer expenses incurred, regardless of where those expenses appear in the financial statements and their notes.
To get around to answering your question about what I think of the bill, I don't have a strong opinion because I don't have an informed opinion. The tax benefit is a political issue. Whether or not the benefit remains in place, there will undoubtedly be deals cut behind closed doors about other tax and funding issues. Not knowing what those deals are, I believe it's naive to think that we can have an informed opinion about the repeal of the tax benefit.
The part of the question that is a little less political (or should be though I'm not naive enough to believe it really is), is the issue of whether or not the expenses associated with stock options should be accounted for in the financial statements, rather than being mentioned in the notes. Again, I don't have a strong opinion. However, because I lean toward financial statements being more transparent than less transparent, it's probably a good idea.
If the accounting regs change, my concern is that investors won't be educated enough to realize that the reality, the truth, hasn't changed. Only the presentation of truth and reality has changed. If the change is made that requires accounting for options as an expense, I'd also like to see that companies are required to restate financial statements for the previous five years using the same regulation. That would give investors a clear picture of the trend using a consistent reporting format.
--Mike Buckley |
