Please take a look at Bill Parrish's homepage:
www.billparrish.com
and
wweek.com
for more on this topic. You are correct, there's no revenue reported but here's a small excerpt:
The way the option loophole works is simple. In lieu of cash compensation, high-tech companies have increasingly chosen to grant employees stock options. Over the past decade, Microsoft has issued more than 500 million such stock options. Each option gives an employee the right--but not the obligation--to buy shares over a several-year period at a price set at the time of issue.
For example, an employee might own 1,000 options to buy Microsoft stock at $30. If she exercises those options and then sells the shares at a current market price of, say, $150, she pays $30,000 and receives $150,000. The resulting $120,000 of profit is taxable as regular income. Although Microsoft didn't pay the employee that $120,000, IRS rules allow the company to treat the $120,000 as an expense for tax purposes.
The net effect, Parish contends, is to make the company's financial results look better than their operating results.
So what their practice does is allow the company to report better financial health than otherwise possible since they claim these options "payments" as an expense. This expense is not reported in their annual earnings reports or financial statements as such but rather as revenue.
This is misleading.
MSFT also writes alot of put options to cover their employee options contract which generate more money for them which again, is reported as revenue.
I'm not a financial genius or even understand alot of this but from what I have read, it sounds fishy. I don't know about you but I'd love to have some smarter minds look into this factor and let us know the truth.
If MSFT can report "better" numbers based on this process which in turn fuels investor sentiment, do you think this is a fair and right representation? (from an investor's point of view?). What happens when the stock no longer can achieve growth necessary to maintian this structure? Does MSFT then incur HUGE tax liabilities due to compensating their employees in a more traditional fashion?
Could it be possible that MSFT is actually working in a very small profit range and using this loophole to "trick" the market into thinking it's really doing better?
Just the thought of these questions has me worried not only about MSFT but CSCO, DELL and AOL who also use this technique. What happens when everyone else jumps on the bandwagon?
Ok, I'm off my soap box...
Peter J Strifas |
