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 : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: Clarksterh who wrote (15)	6/11/2002 1:30:26 PM
From: hueyone	Read Replies (1) \| Respond to of 786

If the company sold the same shares to the public and then used the money to pay workers, it would be an expense under anyone's definition. But if the company takes those same shares and has the employees purchase those shares below market value and then lets the employees resale the shares at market to book the profit, you think it isn't an expense? Can you explain to me the difference in economic terms between the two scenarios? You can't, because there is no difference. It would effect earnings not at all* except that there would be dilution.* Time out. We are mixing up cash flow line items with earnings. Earnings are commonly defined as net income. When the company sells the same shares to the public and then pays the employee out of those proceeds, there is a reduction in net income (earnings). But under the current, false accounting rules, when the employee exercises stock options, there is no corresponding deduction from net income (earnings) for the difference between market price and strike price at time of exercise. Consequently in example number two, net income before tax is inflated precisely by the difference between the market price and strike price at moment of exercise. Separately from the matter of impact on earnings (net income), you contend that there would be great difficulty in reconciling cash flow statements if employee stock options were expensed. I have not seen any accountants raise this as a potential problem related to expensing employee stock options, but I will try to work through some examples in my spare time and see where it leads me. Why does the IRS so readily recognize this expense? It is a form of corporate welfare Please tell me more about the circumstances under which this corporate welfare came about. Do you have evidence to support your contention? If you don’t have evidence, then I will continue to assume that the IRS looked at the stock option compensation issue and came to the same conclusion that the Financial Accounting Standards Board and many other accounting professionals have come to---and that is that the cost is a corporate expense that should be deducted from net income (earnings). Best, Huey

To: Clarksterh who wrote (15)	6/13/2002 10:30:04 AM
From: hueyone	Read Replies (1) \| Respond to of 786

Hi Clark: Regarding the assertion that you have made several times--- that expensing stock options would result in a perversion of the cash flow statement, I just don't see it. I am not an accountant, but If I were preparing the books, here is the way I would do it: Under employee compensation we would include the difference between the market price and strike price at exercise. Voila, we just improved the accuracy of the employee compensation number as well as the accuracy of the net income number. Next, under the line item titled “Adjustments to reconcile net income to net cash provided by operating activities” in the cash flow statement, we would include a new line item titled “Provision for non cash income from issue of shares”. This amount will be a positive number and will exactly equal the employee stock option compensation expense reported in employee compensation. All the other numbers would remain the same, except the line item “tax benefit from exercise of stock options” would disappear, because this tax benefit will already be reflected in lower taxes (cash outlay) in the line item called “Income taxes” in the net income statement. Working through the rest of the numbers, you end up with a figure in the line item titled “net cash provided by operating activities” that is exactly as it should be. No perversion; no problem!!! I believe we already have at least one real life example of handling stock option expenses on the income and cash flow statements. Boeing company is said to expense employee stock options in their income statements to shareholders. Looking at Boeing's 10K, under "Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities" on the cash flow statement, I see a line item simply titled "Share Based Plans". I expect the line item corresponds exactly to my suggested line item titled "Provision for non-cash income for issuance of Shares". Best, Huey