Wayne -
You might find the following of interest :
A quiz on valuing and accounting for non-monetary compensation -
There is a lot of discussion on how to account for employee options, both in actual accounting and in investor company valuation. A hypothetical situation is described below that might help shed light on what matters and what doesn't.
Assume a diamond mining company located on a volcanic island in the South Atlantic. It is not subject to any taxes and has an ADR listed on the NYSE. It is a fully above-board company whose Chairman is John Templeton. It fully complies with U.S. and NYSE accounting rules.
The Annual Report has just been published and full year revenues are $1B ($1,000,000,000) on sales of 1000 large diamonds at an average price of $1,000,000. All pertinent data, including earnings and outstanding shares, are disclosed, but the actual numbers are not believed to directly impact the discussion below. The company believes that it has diamond reserves that will allow it to continue in business under current conditions for at least 100 years.
Last year, the President received a salary of $250,000, but in future years he will be compensated with a salary of $100,000 and will additionally receive a diamond of about $1M in market value. No restrictions are placed on its disposal.
Question 1. - Should future earnings reports make any expense adjustment for the diamond compensation? What number should appear for the President's compensation expense?
Question 2. - Next quarter, an investor will look at the quarterly report for revenues, earnings, etc. and will value the company accordingly by whatever means he deems appropriate. Does the change in the President's compensation change the valuation an investor should place on the company? If so, how?
Regards, Don |
