Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Bob Brinker: Market Savant & Radio Host -- Ignore unavailable to you. Want to Upgrade?

To: Skeeter Bug who wrote (14742)	7/13/2001 2:03:38 PM
From: Boca_PETE	Read Replies (3) \| Respond to of 42834

Skeeter Bug- The reason 98% of companies that grant employee stock options choose not to book stock option expense for such options is because IT MAKES NO SENSE when you follow the cash flows related to the granting and exercise of such options. Fortunately the choice not to book expense under APB Opinion No. 25 remains available under current accounting rules. But all companies that choose not to book expense are required to disclose annually in the footnotes to financial statements the per share impact on EPS had they booked such stock option expense. So it's all there for people who are so inclined to make the deduction from net income whether or not it makes any sense. Companies usually grant stock options at an exercise price equal to the market value of the company stock at the date of grant - say that's $10 per share. There is no expense recorded at that time because no value has changed hands - there is just an agreement between employee and employer fixing the price the employee can buy company stock at in the future with such price equal to current market value. Say the company stock value rises to $30 per share at the date the employee buys the stock at $10 upon exercising his/her stock option. Upon receiving the stock, the employee immediately sells it for $30 per share in the open market through his/her broker - maybe even to you. Ask yourself, Skeeter. Who funds the employee's $20 profit - the company ? I don't think so! No assets leave the company to fund that $20 per share profit on the stock option that the employee makes and therefore no expense can be recorded that makes sense - it's not an expense of the company. In fact, the company is expanding it's capital by issuing stock to the employee at the agreed $10 option price and cash is actually coming into the company (not going out of the company for an expense). This is why those few number of companies that do choose to record expense for stock options adopt required convoluted accounting which results in offsetting the expense charge by an increase in the "Capital Surplus" account. It's a total joke - charge expense which reduces "Retained Earnings" (one stockholder equity account) and credit "Capital Surplus" (another stockholder equity account - net effect on Stockholder Equity equals ZILCH-ZERO-BUBKISS because no assets leave the company in the stock option grant and exercise process, instead assets come into the company when options are exercise and capital is increased by issuing shares to the employee. So who funds that $20 profit, Skeeter ? It's you or some other buyer of stock in a shareholder-to-shareholder transaction that funds that $20 profit, not the company. Oh you say companies give employees "Treasury Shares" when they exercise their stock options and therefore assets do leave the company to buy those "Treasury Shares" (ie. repurchased common stock). This is not a valid objection because "Treaury Shares" are required to be classified as a deduction from "Stockholders' Equity". This is because a company's re-purchase of its' own stock is conceptually deemed to be a contraction of capital (the opposite of an expansion of capital when companies issue their shares to the public). This is why "Treasury Stock" is not permitted to be reported as an "asset" on company balance sheets. This is all interesting stuff to a few people in the world, but too boring for most. Besides it's easier to just take unsubstantiated pot shots at companies and accountants without digging deeper to understand "the why" of how they account for various complex issues. P