SB,
don, company "a" in my example is in better financial position than company "b" b/c the company got the ALL the proceeds from their 1,000,000 stock issuance instead of splitting it with the employees.
there is, in fact, a very REAL cost to the company - not just the shareholders.
Stock and option grants really do not represent expenses to the company itself, and, in fact, in the case of options produce real positive cash flow to the company. This is hard to accept, but let me try an example that just might help clarify the fundamental issues.
Assume that the CEO of a company has two framed company stock certificates on the wall of his office. Both are for one hundred shares and are property of the company. Assume that the market price of the stock is $100.
The certificate on the left is real, but since it is owned by the company, it is also indirectly owned by the existing shareholders. It has no importance by itself, as can be seen if it is simply distributed to its shareholder owners as a fractional stock split of no importance.
The certificate on the right is a forgery, signed by the world's greatest certificate forger, and appraised at $10,000 as a work of art.
The two certificates are taken off the wall, mixed up in a dark box, and the Employee of the Year is allowed to reach into the box and pick one of them as his award.
Depending on which certificate is picked, what are the proper accounting results?
If the forged certificate is picked, the company has lost a $10,000 item that it can no longer sell or replace. The employee has received $10,000 of value. The shareholders have also been injured in that $10,000 worth of something they owned is lost, but no change in ownership shares has occurred. This is a $10,000 expense that impacts both the company and, by extension, its shareholders.
If the real certificate is picked, the company has given up something of no value to itself, as seen above, and, in any case, something that it can replace simply by printing up a new certificate at minimal cost. The employee has received $10,000 of value. The shareholders have been injured by having their share of company ownership reduced by $10,000 by dilution. This not an expense to the company, because if it were recorded as such, the shareholders would have been recorded as having suffered a total of $20,000 worth of injury, a double count.
As an alternative, assume that instead of the employee taking home the real certificate directly, the real certificate is broken up and distributed to existing shareholders as a fractional stock split. If they then give these received shares directly to the employee themselves, the net results are exactly the same as if the employee took home the real certificate. But in this case, there is no possibility whatever of an accounting expense, unless stock splits are to be expensed, which is, of course, ridiculous.
I don't know if this helps, but think of a company possessing its own shares as similar to you owning an IOU that you've written to yourself. You can write as many of them as you want, but you never become a penny richer from doing so. Nor do you experience a loss if you accidently run one or more of these IOUs through the wash in your pants pocket.
Regards, Don |
