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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (148780)	7/24/2002 5:51:06 PM
From: i-node	Respond to of 1577009

The problem with counting the value of options against income is that the value is accounted for by dilution. Well, not exactly. The issuance of an option doesn't give rise to dilution at all. It is the subsequent exercise of the option that brings about dilution. But I know what you mean. I believe that in the interest of conservative treatment, options SHOULD be expensed at the time of grant. The issuing corporation didn't just get this labor for free; they had to give up something of value, and that something was [a chunk of] the existing shareholders' equity. In effect, there were two transactions: (a) The existing shareholders relinquished some of their holdings; and (b) those holdings were handed over to the employees in exchange for services. The SUBSTANCE of the transaction is identical to the situation where you (a) sold additional shares on the open market for cash, and (b) used that cash to pay employees. In this event, you'd still have dilution but also would have the expense. Which, it seems to me, is as it SHOULD be. The point on the dilutive effect is that, as a practical matter, whether they are dilutive or not has no bearing on income determination. We don't adjust income to compensate for the dilutive effect of, for example, issuance of secondary shares. These are market phenomena that the market will take care of. That said, there is a great deal of debate going on amongst accountants about this subject. I believe the debate over the treatment of options is actually one subject that predates the FASB (when the Accounting Principles Board, a committee with much more benevolent objectives than FASB) was the rulesetting body. Obviously, it is one of the more difficult areas, and the problem has been exacerbated by the recent increase in the use of options as compensation.

To: TimF who wrote (148780)	7/24/2002 6:25:07 PM
From: tejek	Read Replies (1) \| Respond to of 1577009

If you have two companies A + B, that are exactly the same except that A pays employs in cash and B pays 100% of employee costs with options. Assume they start with the exact same number of shares at the exact same price, but the options B gives to its employees increase the number of outstanding shares. Then if you count options against earnings they have the same revenue and earnings, however B will have more diluted shares. The two companies with the same revenue and the same costs (counting the options as costs and assuming that the cost is the same as the cash A pays), and the same profits but B will have a lower earnings per share number because it has more outstanding shares. The EPS figures double count the cost of the options, as they are counted against earnings and against the number of shares. Tim, so what Buffet is saying is that this dilution needs to be expensed in some way, right? ted