Employee Stock Options - NQSOs & ISOs Message Board

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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs

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To: Clarksterh who wrote (15)	6/11/2002 1:30:26 PM
From: hueyone	Read Replies (1) of 786

If the company sold the same shares to the public and then used the money to pay workers, it would be an expense under anyone's definition. But if the company takes those same shares and has the employees purchase those shares below market value and then lets the employees resale the shares at market to book the profit, you think it isn't an expense? Can you explain to me the difference in economic terms between the two scenarios? You can't, because there is no difference. It would effect earnings not at all* except that there would be dilution.* Time out. We are mixing up cash flow line items with earnings. Earnings are commonly defined as net income. When the company sells the same shares to the public and then pays the employee out of those proceeds, there is a reduction in net income (earnings). But under the current, false accounting rules, when the employee exercises stock options, there is no corresponding deduction from net income (earnings) for the difference between market price and strike price at time of exercise. Consequently in example number two, net income before tax is inflated precisely by the difference between the market price and strike price at moment of exercise. Separately from the matter of impact on earnings (net income), you contend that there would be great difficulty in reconciling cash flow statements if employee stock options were expensed. I have not seen any accountants raise this as a potential problem related to expensing employee stock options, but I will try to work through some examples in my spare time and see where it leads me. Why does the IRS so readily recognize this expense? It is a form of corporate welfare Please tell me more about the circumstances under which this corporate welfare came about. Do you have evidence to support your contention? If you don’t have evidence, then I will continue to assume that the IRS looked at the stock option compensation issue and came to the same conclusion that the Financial Accounting Standards Board and many other accounting professionals have come to---and that is that the cost is a corporate expense that should be deducted from net income (earnings). Best, Huey

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