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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Bilow who wrote (83091)	8/17/2000 11:32:28 PM
From: Don Lloyd	Read Replies (2) \| Respond to of 132070

Carl - [[[...Re: "Austrian Economics....[deleted to prevent confusion] I agree with you here, but I have not made that argument. Just because something is valuable is no reason to list it as a high expense to the person giving it up. (Think virginity. Women have been known to give that up many times in succession.) But that is not part of the reason for classifying stock options as expenses to the company. Accounting has nothing to do with who got rich or what have you, it has everything to do with allowing humans to easily gauge the worth of shares in a company, or the company as a whole. In order to fill that purpose, employee expenses must be carried as expenses, not ignored. Suppose a company was formed who's only reason for existence was to sell a large pile of diamonds. They could pay their employees with diamonds, if they wished, or cash instead. I know this has nothing to do with motivating employees to work harder and all that, but motivation has nothing to do with accounting. Accounting is purely a technique for looking into the past and trying to assess whether a business was profitable, and by how much, and trying to assess what the business is worth. It has nothing to do with who got rich and who got motivated or by how much. Now what is the purpose of profit and loss statements? Are they to help determine the financial health of a company, or are they to assist potential shareholders in analyzing the value of their stock? I say the latter. I also say that the SEC exists to protect the interests of the investors, not of the companies (which are fictitious entities, can't vote and are not even people anyway). So which is a more accurate assessment of the Diamond selling company? The one where the employees are paid in cash, or the one where the employees are paid in diamonds? I say it is clear to us both that the worth of the diamond selling company has to be taken as the value of the diamonds owned, minus the costs of selling them, with something thrown in for risk and time value of money. If the payroll is paid in terms of cash, we are in agreement. If the employees are paid in diamonds, then we are probably also in agreement, because you will note that the diamonds are limited, have a definite value, and the company cannot manufacture an infinite amount of them out of thin air. But with stocks, we are in disagreement, because the company can manufacture an infinite amount of it. Did I get the gist of our differences here stated succinctly? Namely that you feel that a company cannot carry as an expense something that it can manufacture infinite amounts of without cost?]]] Start of reply ---------------------------------- Actually, we are diverging, not converging, at this point. As my earlier post indicated, the Subjective Theory of Value states that all values are subjective. There is no such thing as an intrinsic value for an economic good. Thus diamonds do NOT have a definite value. Nor do dollar bills. Nor does gold. In the real world, diamond suppliers are monopolies, and limit sales to keep market prices up. If the diamond supplier chooses to use a diamond as a part of compensation, it suffers an opportunity cost in losing a potential sale of that diamond. However, the opportunity cost is NOT the market price of the diamond, because the diamond sale that is lost is the diamond that is the last one to be sold from inventory. Up to that point, all sales remain on plan. This may be a century in the future, and has to be discounted to a present value. In fact it could be many centuries, and in fact is almost certain to never cause a current sale loss within the lifetime of any of the company principals or shareholders or their first generation descendents. It is very easy to imagine that current foregone cash salary can easily exceed the discounted present value of the precluded sale of the very last diamond. Both the option compensation and the diamond compensation share a confusing factor in that something that belongs to the shareholders is used as non-salary compensation. It may help to find a case where this is not true as a reference point. Assume that the State of NY wants to attract a company to a depressed upstate region. Out of several incentives it offers, one is 10 state lottery tickets per employee per pay period. For these tickets, the company is charged one cent each. The company is not allowed to keep the tickets for itself. The cost to the company is one cent per ticket and does not even require a change in accounting methods as it is a real cash flow. The value to the employees is unknown, but certainly is much greater than one cent per ticket, and could easily exceed the lifetime value of the company. Is there a requirement for a phantom income statement salary expense? Regards, Don