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Pastimes : Clown-Free Zone... sorry, no clowns allowed
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To: Les H who wrote (178888)7/10/2002 6:59:00 PM
From: Les H  Read Replies (1) of 436258
 
Did Microsoft Earn $7 or $5 Billion?

Perhaps the most controversial FASB statement concerned stock-based compensation. An “exposure draft” would have required companies to recognize additional expense based on the “fair value” of employee stock options. A storm from management followed with hundreds of letters going to the FASB, the SEC, and various members of Congress protesting the prospective use of “fair value” and insisting that “intrinsic value” should continue to be used. The difference between fair value and intrinsic value is enormous. (Intrinsic value is often zero.)

The final “compromise” reached by the FASB was to allow companies to use intrinsic value in the financial statements if they would reveal in the footnotes how much different the numbers would have been if fair value were used. All but two of the S&P 500 employ this compromise.

An investor in Microsoft is accordingly confronted with this conundrum (FYE 6/30/01): From the two income statements she learns income was $7.3 billion, but from the notes she learns it would have been $5.1 billion if the stock option expense had been charged against income. If she thinks there must be a mistake and one of the numbers cannot be correct, she discovers there is an FASB pronouncement that says this self-contradiction is GAAP!

Here’s another example of the GAAP morass: In Fortune (6/25/2001), Justin Fox suggests the “going-away present” given retiring CEO Jack Welch by GE might be worth $1 billion. “Another reason investors didn’t blanch: According to the company’s income statement, giving Welch all those options didn’t cost a dime. There’s a technical term for the financial inconsistency: nuts.”
It’s no excuse to say some investors may throw away the statements and use the footnotes instead and that the true value of the company will accordingly be reflected in the marketplace. That suggests accountants and analysts who read FASB statements and who are waiting for the information and act promptly upon its release have an advantage over those intimidated by the notes and naïve enough to make decisions based on the statements. It suggests more. If this sort of regulation continues: “We prefer A, but if you want B in your statements that’s fine as long as A is in the notes,” then audit reports should warn readers to ignore the statements and act on the notes. It suggests still more: Why publish the statements?

strategicfinancemag.com
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