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

To: Don Lloyd who wrote (83096)	8/18/2000 1:01:41 AM
From: Bilow	Read Replies (1) \| Respond to of 132070

Hi Don Lloyd; I'm still looking for a simpler case where we disagree on the proper accounting. What about a company that gives stock options on its own stock in return for product to sell? Or sells options on its own stock for any other purpose... But for the example of the company that gives lottery tickets (purchased at $.01) to the employees, I agree 100% that correct accounting for the cost is $0.01 each ticket, and that this cost, not the eventual value to the employee, is what should be included in the income statement as compensation expense to the company. This is very clear and obvious. In fact, if the employees of a ski resort get a great view, should management have to include the value of that view in their P&L? Of course not. But this thinking does not apply to the case of employee stock options. I have never suggested that the eventual value of stock options be included in the compensation costs to companies. There are plenty of people who believe that since Microsoft employees made X dollars on their stock option grants (some from years ago) in 1999, then that money should be included as an expense on the 1999 Microsoft P&L statement. You keep beating this dead horse, but I am in agreement with you, and GAAP is quite clear on this. Expenses and income are to be matched by time period. If the stock options are granted in 1987, then the company has to show the expense associated with them in their 1987 P&L, not their 1999 statement. You wrote: "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." I think that this is probably the crux of the biscuit. My way of thinking is that the company belongs to the shareholders. The company does not own itself, for instance, as it is not a real entity. Whenever the company gives something that belongs to the shareholders to someone in return for that someone working for the company, that something must have an impact on the P&L statement. It is an expense. Stock signifies ownership of the company. When a company gives stock to a person, every other shareholder owns proportionately less of the company. They have lost something, and that something must show up on the P&L statement. In the case of the diamond company, you changed my example of where there was a finite number of diamonds into one where the was an effectively infinite supply. This is unrealistic in the real world. The diamond cartel does not possess an infinite, or even an effectively infinite supply. Nor is there an infinite demand for the things. Because of these two facts, it is true that there is an opportunity cost to the diamond supplier to give their employees diamonds, regardless of how many they have, and how many years they expect to sell them for. This is a consequence of the economic laws of supply and demand. (Which laws the Austrians economists are quite in agreement, with other economists, as to the existence of.) You also are in agreement that there is a law of supply and demand in the diamond market: "In the real world, diamond suppliers are monopolies, and limit sales to keep market prices up." For this reason, there is an opportunity cost for the diamond companies to pay their employees in diamonds, and they will therefore have to list that cost as an employment expense. The only way of avoiding this is if the employees agree to never do something that would decrease the price of diamonds (sort of like a lock up period in stocks) and that decreases the value of the diamonds (or shares) to the employee, meaning that the employer will have to increase the amount given. A simpler assumption would have the employee selling the diamond (stock) and getting an amount of money equivalent to what the company would get for it. Since this is identical to the case where the company sells the diamond (stock) and then gives the employee the cash, they need to be accounted the same. Accounting is a very practical subject. The law of supply and demand is why stock dilution has to be counted as an expense. As another example, if Amazon.com gives a book manufacturer stock in AMZN in return for a pile of books, this must be counted as a cost of the goods sold. (I believe that at this time, if Amazon did give a book manufacturer an option on AMZN stock in return for books, this is not counted as an expense for Amazon. This would be as wrong as not counting employee stock options as an expense, and for the same reason.) -- Carl