Good morning Don,
I must have not been clear. I am NOT saying that dilution of any type, including options, is NOT a cost to the shareholders. I AM suggesting that the appropriate way to deal with it is in the 's' of 'eps', not to make an imaginary adjustment to the 'e'.
Since earnings are imaginary by definition (consisting of imaginary revenues (A/R) plus real revenues (cash receipts) minus imaginary expenses (depreciation and the like) minus real expenses), why not include another imaginary expense?
Second, I think your analysis smears the distinction between a corporation and a partnership. As you point out, the issuance of stock options for employee expenses is a cost to shareholders. If we were dealing with a partnership such costs would certainly be considered an expense.
Third, have you considered the effect of altering the order of events? Suppose the the company were to issue additional shares at market value (a non-income statement transaction), and used most of the cash raised to pay employees (an income statement event). Net-net, the financial condition of the corporation and individual investors would be exactly the same, but the financial statement treatment is vastly different. Since the purpose of financial statements is to disclose the financial condition of the corporation I offer this as evidence of the inadequacy of SEC and GAAP accounting rules.
Finally, a question. It is my understanding that all instruments that may be converted (now, or in the future) into stock are included in diluted shares. That would include convertible securities along with option grants that can only be exercised some time in the future. Am I mistaken? The following quote is from Wiley GAAP 99:
DEPS is a pro forma presentation which reflects the dilution of EPS that would have occurred if all contingent issuances of common stock that individually reduce EPS had taken place at the beginning of the period (or the date issued, if later).
TTFN,
CTC |
