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Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host
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To: kahunabear who wrote (5223)5/29/1998 9:49:00 PM
From: Boca_PETE  Read Replies (1) of 42834
 
WS: RE:< I still think that the accounting for options is flawed -example of company buying "a stock" in the open market for $50 and selling it to its employees for $10.>

First, I assume when you say "buying a stock in the open market" that you mean a company buying back its own stock, not buying the stock of another company.

From an accountant's viewpoint, a company buying back its own stock is a completely separate and different transaction and not necessarily intended for the purpose of re-issuing the shares to employees that exercise stock options. Bought back shares reduce outstanding shares and therefore increase earnings allocated to the remaining outstanding shares. They also conserve cash that would have been paid out as dividends on the bought back shares (treasury shares). Sometimes treasury shares are re-issued to employees at no cost to them. When this occurs, the fair value of such shares IS required to be charged against earnings as an expense.

From an accountant's viewpoint, a company's earnings result from operations (selling goods and services), investing activities, and other NON-OWNER RELATED transactions. Buying back stock is an OWNER RELATED transaction on which by definition there can be no profit or loss, only capital expansion (ie. issuance of shares) or capital contraction (buy back of shares). Thus by definition there can be no profit or loss on the buy back of shares or the issuance of shares.

Regarding the "where are the earnings going if shareholders are not getting dividends and book values are falling" question, when companies buy back their own shares they disperse cash. Paid out cash reduces book value, The reduced number of shares increases earnings per share and supports the market value of the stock. Increased share price results in UNREALIZED non-taxable gains to shareholders until they choose to sell. At that time, gains are taxed at lower capital gains rates, instead of at ordinary tax rates dividends are taxed at - a much better deal for the shareholder.

Hope this helps reduce your concerns.

P

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