Hi Skeeter; Seems like I'm being bullish on the DELL bear
thread, and bearish on the bull thread. :) I really think this
stock is one overpriced hombre that is gonna be writing
red ink within 5 years.
The problem is how to account for options. I think we
agree. If a company gives something to an employee
that is worth $1000, then (even if that thing is "free" to
the company, like shares and options), the company
should take a charge to cost of employees of $1000.
This seems pretty clear, but is not required by the current
silly accounting rules for reported earnings.
But according to FASB #123, companies do have to figure
the cost of their (stock option) gifts to employees and
compute an adjustment to their net profit/loss accordingly.
They publish the number, but almost nobody uses it, cause
it isn't the official number. I think it should be.
The adjustment is included in the DELL 10K. The value of
the options is computed according to the value when
they are granted to the employees. At the time they are
granted, they have no intrinsic value, and have only time
premium. That is why there are no tax consequences to
the employee. But Black-Scholes allows a computation
of the time premium. That computation is included in the
DELL 10K, and causes DELL's earnings to be reduced,
but not nearly by as much as the bears would like.
Lets make a little change to that Corolla charity thing. Lets
suppose a guy donates $1000 (in the form of reduced wages)
to a charity (i.e. the company), and recieves a lottery ticket
(i.e. a stock option). If he wins the lottery (i.e. the stock goes
up a lot), then he gets a new Ford (you don't drive Corollas
in Texas). Of course, if he wins the lottery, he has to pay
taxes on his winnings.
Any difference we have, is on how to value the lottery
ticket. I suggest the right value is the value at the time
it is given to the employee. If it wins later, so be it, but
don't charge some larger (or smaller) amount to income.
If a company gave away lottery tickets and one of the
employees won $130MM, would that mean that the
company should take a charge for that amount?
Suppose you did charge stock options to income. What
are you going to do when the stock goes down? Take a
big windfall profit? Nah, just try and figure out a cost at
the time it is given, and charge it to that accounting
period. That is the way of FASB 123, and that is the
way I think it ought to be done.
That stuff where the company buys back shares is just
an old magician's trick. Audience sees two things going
on at the same time and concludes that they are related.
Take a look at MSFT. Their CFO said that the stock was
too high, and they quit buying it. But they are still getting
options exercised, and lots of em.
Bill Gates is an employee of MSFT. He owns 25% of the
stock or so. The stock went up a 10 sticks. Does that
mean MSFT lost billions of dollar? Does MSFT earn it
back when their stock goes back down? Answer these
questions if you want to say that FASB 123 is not the
correct way to calculate the value of stock options
and stock grants.
My answer is that MSFT doesn't earn or lose money based
on how its stock performs. Thus you have to expense the
value of the stocks and options given Bill at the time they
were given, not 10 years later.
Trying to pin DELL's fiscal 1998 earnings with the current
value of employee stock options given 5 years ago makes
no accounting sense at all. The guys who got the options
became investors, and what the investors make just doesn't
go into the company profit and loss. If a MSFT employee
trades the company stock, his losses do not show up on
the MSFT income statement as reductions to payroll. And
the increase and decrease in value of options granted
employees, just like the increase and decrease in value of
stock granted directors and employees, are not expenses
of the company.
Part of the confusion is that because of tax rules,
the grants are options instead of stock. If it was
stock, it would be silly to suggest that when the
stock went up in price the company should take
a hit. After all, a lot of the stock in these companies
is owned by employees. Michael Dell, for instance.
It just doesn't make sense to charge the company
for Mike getting rich off the stock or the stock
options. (Much though we may envy it. :) Instead,
you have to value things at the time they are given
away, and that is what I am suggesting.
On the other hand, I agree with you completely that the
fair market value at the time of grant shouuld be included
as an expense when a company gives away stock and
stock options. But not the fair market value 5 years later,
only the fair market value at the time of grant. That is
how the FASB 123 works, and I agree it. If you have
an alternative accounting scheme, lets here it.
-- Carl |
