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

To: Skeeter Bug who wrote (14757)	7/13/2001 8:10:38 PM
From: Boca_PETE	Read Replies (1) \| Respond to of 42834

Skeeter Bug RE: warren buffett says stock option accounting leads to an "alice in wonderland outcome." Is Buffet an accountant ? No, he's an investor and would not know "the why". He's like you :-) RE: "If options aren't a form of compensation, what are they?" To the employee they are compensation. To the company granting them, they are a bonanza because the company not only doesn't fund the appreciation in the shares under option from the date of grant, but it also gets a special tax benefit when employees resell the shares they bought from exercising company stock options. That tax benefit is reflected as a reduction to "Current Income Tax Expense". RE: "And, if (stock option) expenses shouldn't go into the calculation of earnings, where in the world should they go?" Cash received by the company from the employee in the exercise of a stock option is reported as an "asset" on the balance sheet. The par or stated value of the shares issued to the employee is reported as "Common Stock" and the excess of the cash received over the par value is reported as "Paid-in-Surplus" - both stockholder equity categories on the balance sheet. The appreciation of the shares from date of grant in reflected on the balance sheet of the individual buying the shares from the employee as their cost basis. Such appreciation has nothing to do with the company that issued the shares - it's funded in a shareholder-to-shareholder transaction, not by the company. This is how stock options work - I doubt if Buffet would dispute how stock options work. He just needs to rethink the accounting for how they work. He may be a market savant as an investor, but IMHO he is challenged in the accounting skill area. Anytime time he wants to meet to discuss this issue, I'm available and would be happy to help him understand. If I'm all wet, there must be some reason APB 25 was not repealed by the FASB in Statement 123 which provides for the choice of methods. Yes, the reason is that companies felt so strongly that the proposal made no sense that they petitioned congress and got the Senate to overwhelmingly pass a resolution barring the banning of APB 25. So the FASB had to knuckle under and allow the choice that remains to this day. RE: "In effect, accounting principles offer management a choice: Pay employees in one form and count the cost, or pay them in another form and ignore the cost" When it is said 'pay them (the employee)in another form (stock options)', I would contend that the company is not paying them the appreciation on the shares under option and is therefore not entitled to record "the cost". And the company is being paid by the employee for the cost of the shares being issued to the employee - the company is incurring no cost. Instead it is an expansion of company capital in exchange for cash. P

To: Skeeter Bug who wrote (14757)	7/13/2001 8:50:38 PM
From: Kirk ©	Read Replies (2) \| Respond to of 42834

Warren is a smart guy but he blew it on that one. He has to have shares AUTHORIZED to issue stock options. These shares he then issues and it is like printing money when they are exercised (his company gets cash). Of course, they dillute his outstanding shares and that is why he needs shareholder approval. The PRICE he pays at the time of issue is the dillution. IF he doesn't have the shares in reserve, then he will have to go out and buy them on the market. Many companies do this anyway where they take excess cash and buy back shares then sell the shares to the employees that exercise options. Their goal is to buy back shares when cheap then sell them to employees when higher (and the employees do a cashless exercise and sell the shares to Brinker...) BTW, if the stock goes down.. .then the options expire worthless and the company gets to keep its shares or sell them on the open market. Funny, but I had a much higher opinion of Buffett until I read what you wrote. Are you sure YOU got it right or did you edit it to make a point? With all the noise you've been making about this for some time, I though you at least understood it... Kirk