I don't wish to seem indelicate here, but if I may, a much simpler explaination without all the rhetoric and character assassination is:
About 70 years ago, the issue first came up. The determination of the tax and accounting treatment of stock options for employees was determined by tax attorneys and accountants.
This is the issue: Conceptually, when a corporation issues stock to employees in exchange for services, the corporation recognizes no loss. Both tax wise and economically.
All that has happened is that the corporation has been enriched by the service performed by the employee, or will be enriched, possibly at a future time by future services.
What has happened is that the stock has been or will be diluted.
Both tax wise and accounting wise the issues are similar. It is not really an expense, but the act WILL reduce retained earnings at least on a pershare basis.
The old answer was simple. Reduce RETAINED earnings. This will limit future taxability, without disturbing current earnings. This is not a perfect answer, but it is a good reconsiliation with economic reality.
This solution worked for about 50 years, but about 10 years ago concern was had over disclosure.
The only purpose the SEC is intended to have is to insure that companies disclose all material facts.
The government's role is to make sure investors are told all the significant or material facts, NOT TO DETERMINE what people should invest in. The SEC, under Leavitt, said show both actual and diluted earnings per share and include stock options as if executed in the number of shares.
Now accountants would have clearly disclosed this on their own IF it would be material (ie, many stock options). They would issue clear and concise footnotes explaining in detail what I just said and its dollar effect upon the company.
But since the law prevents Certified Public Accountants from being sued for anything, the SEC had to step in.
Now congress wants to expense them, maybe. The problem with this is that it is stupid.
IT IS LIKE CURING MEASLES BY PAINTING OVER THE LITTLE SPOTS WITH A SKIN-COLERED CRAYON.
Barrett is dead right. You disclose the dilution. Nothing has changed in 70 years. Options still don't effect current earnings per share. |
