|
|
 |
Two Sets of Books
by David Elliott
For many years now U.S corporations have been legally carrying two sets of financial books. One set of books was given to the IRS when it came to tax time. Many of these reports showed well known, leading corporations reporting a loss for the year which reduced their taxable income, or in some cases allowed them to avoid paying taxes at all. In these accounting records the companies that issued stock options to their employees deducted the value of these options as an expense. After all, they did have value, and the company did give them to their employees for services rendered. These options were often given as compensation and incentives, in lieu of higher wages and salaries. It definitely saved the companies a lot of cash flow, an important commodity for any business.
But then we have that second set of books. The second set of books was presented to the SEC and the public at quarterly earnings reporting time. These books did not deduct the value of the options granted to employees, and the granted option values only showed up as teeny-tiny footnotes at the bottom of the pages, and at the back of the quarterly and annual reports. By doing this companies were able to report that they had made money, and had met those important earnings projections. The reasoning was that if a company had to show these options grants as an expense, as it did with the filings with the IRS, we would see a huge number of companies that never made a profit. And if that were the case they would not the ability to leverage themselves, with stock and options, into giant corporations such as WorldCom. Nor could they get employees to work for lower wages by offering stock options.
For example, Microsoft would have had to deduct over $2 billion last year from its earnings, using the rules of the first set of books, and would not, in many reporting years in the past, have ever earned a profit. Some companies such as Coca Cola have decided to reflect these options as expenses, and have adjusted their current earnings report to reflect the real numbers. The ball has started to roll.
The specter of the US congress taking up this issue and changing the rules is being fought tooth and nail by many of the high tech companies. Should the reporting rules change, it could devastate the stock values of hundreds of companies who have in these past two weeks reported profitable earnings. These companies would have to adjust earnings downward to reflect their real net earnings, and might possibly have to adjust for past years' option grants.To quote Warren Buffett, it is not right to deduct option grants under the current accepted reporting methods.
This begs the question: Is the stock market near a bottom? Not if there are going to be new rules on how companies report their stock option expenses. The value of NASDAQ would be reflected with a negative PE.
Boy, how I miss those days of smoke and mirrors.
EDITOR'S NOTE: Be sure to check out David's excellent (and very accurate) Daily Market Commentary at www.MentorMasters.net every day the market is open. Also, visit his website - www.WallStreetTeachers.com.
|
