All,
Here's my understanding of the stock option question: First, there are two sets of books, one for the IRS and one for investors.
What happens is that when a company reports to the IRS, the value of the stock options exercised is treated as an expense (just like employee compensation), thus reducing the operating income reported to the IRS. This has the effect of lowering the tax obligation of the company.
OK, now lets switch to the second set of books kept for reporting to suckers, er, shareholders.-g- In this set of books, the value of the stock options granted is ignored as an expense (per current accounting rules) and operating income is therefore commensurately higher. But, there's an additional benefit, and that is that the taxes to be paid to the IRS are now lower than they would normally be given the reported before-tax profit.
The income statement benefits twofold, one, employee compensation (in the form of stock options) never shows up as an expense, and two, the tax liability is reduced. Both serve to exaggerate the profits reported to shareholders.
Many have tried to change the accounting rules for reporting to shareholders, however, CEOs, VCs, and entrepreneurs have so far successfully blocked any rule changes that would treat stock options as an expense when reporting to shareholders.
Best regards, John. |
