CTC -
[[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?...][
I cannot make a satisfactory argument as to why a new crack added to an already cracked pot is of significance.
However, the expense adjustment approach not only has no economic validity, it does not help deal with the real problems of shareholder dilution and the potential mal-investment of shareholder funds in buybacks at any price. I daresay that you have never seen any company explicitly report what their investment performance is for all investment activities including buybacks and sold puts.
[[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.]]
I have exactly zero expertise in accounting, and am willing to accept what you say, but don't see why the treatment of a partnership should affect the treatment of a corporation which already has to deal with dilution issues.
[[...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...]]
The problem here is the alternative does not accomplish the same thing. There is a real advantage to both companies and employees in using the option grants. Depending on the circumstances, it may or may not translate into an advantage to the shareholders.
[[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).]]
This is well beyond my expertise. From what little I've read, it seems that not all options are currently included in diluted shares. These would presumably include some issued in the past before the coverage of new rules and others that are out of the money. I believe that we are still in a transition period.
Regards, Don |
