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Except that there is no cost to the company, so what is it doing as an entry on the P&L?

Let's resort to bookkeeping. Debits and Credits. And let's run an example.

So you compensate an employee by giving them an option for 100 shares of stock. When they exercise the option, they get the stock. And to temporarily bypass timing issues, let's say the employee immediately exercises the option. So what do we record on the company books?

Well, compensatory options are not typically recorded on the books, so there is no entry there. But now the employee exercises the option and is issued 100 shares of stock. We need to record the issuance on the books. That's a credit to common stock. But what is the dollar amount of that credit? Par value is one possibility. So you credit common stock for the par value of those shares. To keep the books in balance, we need to make an offsetting debit. What account do you propose to debit?

Not cash - no cash changed hands. Not any other asset. The company didn't receive an asset. Not a liability - the company didn't discharge (pay off) any liability here. (There's an argument they paid off the liability for the stock option, but that just moves the bookkeeping question to the entry to record that liability. What account to debit in that transaction still remains the question.) Not an equity account - no one contributed or removed any equity in exchange for the stock. That leaves the P&L. And if you need to make an entry on the P&L, the only account that makes any sense is employee compensation.

Now that you've established the entry as a debit to employee compensation and a credit to common stock, all that's left to argue about is the dollar amount. The accounts remain the same. And the timing might change if the employee doesn't immediately exercise the option. But the journal entry remains the same whether its recorded today or tomorrow or the day after. It's always a debit to employee compensation and a credit to common stock.

Maybe you want to argue that the stock, and therefore the option, is worthless. If it were worthless, why would an employee agree to accept it as compensation for their services? And if the stock were worthless, why is it selling for actual money on a stock exchange somewhere? If the stock is worth something, an option to acquire that stock is also worth something. You can argue about the exact value, but to argue it's worthless flies in the face of reason. It is clearly worth something, or no one would want it.

Therefore, stock options are employee compensation and belong as an expense on the books of the company.

--Peter
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GAAP rules include several provisions which most business-oriented people don't consider reasonable costs of doing business, notably the issuance of stock options, an act which costs the company nothing, but which GAAP treats as an expense.
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FWIW, Harvard Business Review disagrees.

https://hbr.org/2003/03/for-the-last-time-stock-options-are-...

We demonstrate that, contrary to these experts’ arguments, stock option grants have real cash-flow implications that need to be reported, that the way to quantify those implications is available, that footnote disclosure is not an acceptable substitute for reporting the transaction in the income statement and balance sheet, and that full recognition of option costs need not emasculate the incentives of entrepreneurial ventures.

...

Even if no cash changes hands, issuing stock options to employees incurs a sacrifice of cash, an opportunity cost, which needs to be accounted for. If a company were to grant stock, rather than options, to employees, everyone would agree that the company’s cost for this transaction would be the cash it otherwise would have received if it had sold the shares at the current market price to investors. It is exactly the same with stock options.


I tend to agree. I didn't agree with TMF when INTC stopped expensing their options, so they dropped them from the "Rulebreaker" port. I did (and do) agree that they should be expensed.

IMO, it's a way to compensate executives (primarily) without the compensation affecting the bottom line (if you're non-GAAP). That's why the executives like to do it that way.

But is that the only "non-GAAP" thing that occurs? I thought there were other things companies didn't like to report in their numbers.
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"the issuance of stock options, an act which costs the company nothing, but which GAAP treats as an expense."

If you believe that the stockholders are the owners, it certainly costs them something as they will own a smaller part of the company.

It's not an expense though if it comes with some restrictions - maybe it's like the opposite of depreciation.

GAAP needs to address it better than it currently does.

It's part of a salary, which is definitely expense. But how to value it is tough.

But non-GAAP results can be compared with other companies in the same industry.

And obviously it means you need to read the notes that explain what the non-GAAP adjustments are.
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There are other issues with GAAP, but stock options is the biggy in quickly growing tech companies where the GAAP/non-GAAP issue is the most prevalent. Yes, it does effect the stockholders, but it is unrelated to whether the company is profitable and by how much. Yes, it is a part of executive compensation, but it is unrelated to whether the company is profitable and by how much. The Profit and Loss statement is intended to tell one whether the company is profitable and by how much. See the pattern?
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I assume I'm missing something.

I don't think you're missing anything.

Well, perhaps there are occasions where a company would prefer to use IFRS (the international accounting standard) rather than GAAP (which are only for the US). If the non-GAAP statements were actually IFRS compliant, then I wouldn't have much issue with them. You'd need to do some digging to find out why a company would want to do that. And then keep whatever difference it is in mind when trying to compare to GAAP statements.

But yes, the main reason a company would issue non-GAAP statements is because they don't like the GAAP treatment.

I will say that there are some rare occasions where GAAP doesn't handle something very well. But there aren't a whole lot of those situations, and reading the notes to the non-GAAP statements should explain what is going on.

One issue I'll address head-on is stock options for employees. Some will argue those should not be expenses. All I can say is that they are wrong. Period. When stock options are the reason for non-GAAP statements, the company is trying to hide the cost of employee compensation. (Often executive compensation, which is another troublesome issue.) So figure out the missing employee compensation cost, incorporate that into the financial statements, and then start comparing to other companies.

--Peter
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But how to value it is tough.

Valuing stock options for public companies is trivially simple. If a public company has publicly traded stock (and they all do, otherwise they wouldn't be a public company, would they?), they also have publicly traded stock options. Find the publicly traded option that is closest in terms to the employee stock option, and you have valued (reasonably closely) the stock option. At a minimum, you have a starting value from which to make adjustments for differences in the terms of the two options.

I'll agree its harder for privately owned companies. But even then, it's no harder than valuing the whole company. And, to state the obvious, valuation of a privately held company is irrelevant to an investor who only invests in public companies.

--Peter
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"Valuing stock options for public companies is trivially simple. If a public company has publicly traded stock (and they all do, otherwise they wouldn't be a public company, would they?), they also have publicly traded stock options. Find the publicly traded option that is closest in terms to the employee stock option, and you have valued (reasonably closely) the stock option. "

Well maybe. I'm not sure that all public companies have options available - that's up to the market makers. Even so, the maximum length of those options is 2 years and I believe corporate options sometimes run longer than that.

And do you expense that all in the first year when issued or do expenses vary with the option prices.
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"unrelated to whether the company is profitable and by how much. Yes, it is a part of executive compensation, but it is unrelated to whether the company is profitable and by how much. The Profit and Loss statement is intended to tell one whether the company is profitable and by how much. See the pattern?"

Well it's a lot easier to be profitable if you don't account for all the expenses?
See the point?
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Period. When stock options are the reason for non-GAAP statements, the company is trying to hide the cost of employee compensation.

Except that there is no cost to the company, so what is it doing as an entry on the P&L?

Yes, they have a *potential* impact on the shareholders, *if* they are executed, but that is not the function of the P&L and may not even happen ... said as a person who got big stock options in a start up that failed.
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And do you expense that all in the first year when issued or do expenses vary with the option prices.

Or, more to the point, do you recognize that one has nothing to do with the other. Employee options are given for no cost other than service and are given to incentivize behavior to make the company a success. Market options are a way of gambling on the future price of the stock. The two have nothing to do with one another!
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Well it's a lot easier to be profitable if you don't account for all the expenses?

No, since granting a stock option involves no expense. In fact, if the option is exercised, it is REVENUE!
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Thanks. I got it. I specifically didn't bring it up on Saul's board as it would likely be off-topic. I know the folks over there use it a lot, and I think tamhas summed up very succinctly why. I'm just not convinced they are correct that it isn't an expense, even if it's not cash-out-of-pocket.

But I'll read it again anyway.

1poorguy
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"In fact, if the option is exercised, it is REVENUE!"

Really? And yet no cash was received.
Typically the option is at $0 and when it is exercised stock is issued without the recipient paying anything.
In some cases, it's purchased on the open market. That would really become expense then.

It's not even revenue to the receiver until he sells it.

If it's revenue, everybody would do it. Increasing revenue always looks good for the executive. Heck they might even get a bonus of more options...

I'm more inclined to consider them as debt.
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Except that there is no cost to the company, so what is it doing as an entry on the P&L?

Let's resort to bookkeeping. Debits and Credits. And let's run an example.

So you compensate an employee by giving them an option for 100 shares of stock. When they exercise the option, they get the stock. And to temporarily bypass timing issues, let's say the employee immediately exercises the option. So what do we record on the company books?

Well, compensatory options are not typically recorded on the books, so there is no entry there. But now the employee exercises the option and is issued 100 shares of stock. We need to record the issuance on the books. That's a credit to common stock. But what is the dollar amount of that credit? Par value is one possibility. So you credit common stock for the par value of those shares. To keep the books in balance, we need to make an offsetting debit. What account do you propose to debit?

Not cash - no cash changed hands. Not any other asset. The company didn't receive an asset. Not a liability - the company didn't discharge (pay off) any liability here. (There's an argument they paid off the liability for the stock option, but that just moves the bookkeeping question to the entry to record that liability. What account to debit in that transaction still remains the question.) Not an equity account - no one contributed or removed any equity in exchange for the stock. That leaves the P&L. And if you need to make an entry on the P&L, the only account that makes any sense is employee compensation.

Now that you've established the entry as a debit to employee compensation and a credit to common stock, all that's left to argue about is the dollar amount. The accounts remain the same. And the timing might change if the employee doesn't immediately exercise the option. But the journal entry remains the same whether its recorded today or tomorrow or the day after. It's always a debit to employee compensation and a credit to common stock.

Maybe you want to argue that the stock, and therefore the option, is worthless. If it were worthless, why would an employee agree to accept it as compensation for their services? And if the stock were worthless, why is it selling for actual money on a stock exchange somewhere? If the stock is worth something, an option to acquire that stock is also worth something. You can argue about the exact value, but to argue it's worthless flies in the face of reason. It is clearly worth something, or no one would want it.

Therefore, stock options are employee compensation and belong as an expense on the books of the company.

--Peter
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Let's resort to bookkeeping. Debits and Credits. And let's run an example.

Try again, but consider two things.

1. Don't wave away the granting of the option, since that is exactly the thing which is being recorded as an expense which the non-GAAP figure omits.

2. There *is* cash when the option is exercised. An option is a right to purchase so many shares at such and such a price. The expectation is that the price of the option will be significantly below market price at the time the option is exercised. But, the employee does have to purchase the shares from the company.
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Don't wave away the granting of the option,

I will wave it away. Whether the transaction is recorded at the time the option is granted or when the option is exercised, the debit is the same: Employee compensation. There is a compensation expense here. There is a reasonable discussion about when that compensation should be recognized, but it needs to be recognized.

There *is* cash when the option is exercised.

Not always. There are plenty of employee stock options that have no exercise price. Far from all, of course, but the number is not immaterial. Further, the recording of the expense does not depend on whether there is a cash payment for the options. It does affect the amount, but not the fact that there is an expense that needs to be recognized. The addition of a cash exercise price just muddies the waters. It adds the potential for confusion. So I like to explain things in the simplest possible way first. Once you understand the simplest form of a transaction, you can add complexities in with less risk of confusion or obfuscation. A cash exercise price is an addition to the basic stock option transaction. So let's analyze and understand the situation in the most basic form to get a proper understanding.

Keep in mind here that I'm rebutting your claim that there is no expense because the granting of the option has no "cost" to the company. Whether there is a cost or not is irrelevant. Barter happens all of the time. The options undoubtedly have value. If they didn't have value, no employee would accept them as part of a compensation package. Likewise, the employee's time has no cost to the employee. That fact never enters the picture, either. When engaging in a barter transaction - basically any transaction that involves the mutual exchange of non-cash items of value - you need to come to some agreement as to the values involved to properly account for the transaction.

It's also important to note that the whole point of GAAP or IFRS financial statements is to provide investors - current and/or potential - consistent and reliable information about a company. I have no problems with a company using different financial statements for their own internal uses. Most of the time a company SHOULD use different financial statements internally. They have different needs than an outside investor.

--Peter
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It's also important to note that the whole point of GAAP or IFRS financial statements is to provide investors - current and/or potential - consistent and reliable information about a company.

Consistent and reliable is good. The problem with GAAP, especially for young and fast-growing companies, is that it is not reflective of how the business is actually doing. So when you add "mostly useless and misleading" to consistent and reliable what do you actually have?

Accountants don't care much. Not their problem. They're all about counting every tree properly and letting the forest take care of itself. That's why many young and fast-growing companies report non-GAAP as well. That's so they can tell their investors how they think the company is doing in a meaningful way.

Of course then you need to worry a bit more about fraud and deliberate deception. GAAP is consistent and reliable, but it can easily be gamed by unscrupulous fraudsters. But non-GAAP is even easier to game because it's pretty much made up. Which leaves investors with the question of whether they trust management to tell them the truth, which is kind of what GAAP and auditing was set up for in the first place.

For me, I always start with the question as to whether management has integrity. If they don't, then accounting standards won't save you.

-IGU-
(invested mostly in TSLA and ARK funds)
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I will wave it away.

Then you are distorting the whole issue. The point of the issue with GAAP is deducting as an expense the *granting* of the option, whether or not is is ever exercised. At that point, the company has spent no money, taken in no money, and the shareholders are not impacted since that only happens when the options are exercised.

There is a compensation expense here.

Why? There is an impact on shareholders, but the company spends no money granting the option and takes in money when the option is exercised.

There are plenty of employee stock options that have no exercise price.

Got a source? I have never seen such a thing. Even options granted to founding partners when the company is worth nothing have a nominal exercise price. Gotten those, I have.

You seem to be missing two points, which are clarified by being clear about treating the granting and the exercise as two separate transactions. In the grant, no cash goes anywhere. The grant is a grant of a right to do something. a is an obligation, but the obligation is to issue paper, not cash. The exercise, if anything, brings cash *in* to the company.

The point of option grants is that it is something the company can give away without incurring current or future costs. So, it is good for the company, because it costs nothing, and good for the employee because there is the *potential* that a small cash outlay to exercise the option will produce shares whose value is well over the cost. None of this has anything to do with the profit and loss of the company's operation. It seems likely that someplace along the line someone decided, like you, that somehow this transaction should be reflected in the company's report and then ended up with the current rule. For old established companies, the rule has a trivial impact on the P&L; but, for a high tech young company which offers a lot of options, it is a massive distortion of the P&L.

And, yes, I am a big fan of the idea of GAAP and have some history of pointing out to my customers that there was a right and wrong way to handle certain types of transactions ... in some cases in opposition to the initial position of their accountants ... note the "initial" ... I didn't lose any of these.

The whole point of GAAP is to create a uniform way of comparing company financials so that one knew that one was looking at an equivalent statement and not some statement where strange handling was distorting key elements. Great idea, but if one creates a rule that systematically punishes companies that do something like use options as a part of their compensation so that the P&L GAAP number is a massive distortion of their actual profit and loss from operations, then there is an important reason to also repot non-GAAP numbers and for us as investors to pay attention to those numbers.
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Accountants don't care much. Not their problem. They're all about counting every tree properly and letting the forest take care of itself. That's why many young and fast-growing companies report non-GAAP as well. That's so they can tell their investors how they think the company is doing in a meaningful way. - IGU

-------------------------

Our small company has a Line of Credit with our bank and also with a Private business Lender. In both cases, one of the condtions is that we provide regular financial reports to the lender. Once a year, the P&L and Balance sheet must be reviewed and certified by an outside CPA. The CPA firm we use holds us to the letter of law regarding GAAP which I think is a good thing.

This a long way of saying, I don't see how a company can just decide to skip GAAP and still have access to commercial credit markets. Maybe they are living off of cash flow or VC funding or something.
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The problem with GAAP, especially for young and fast-growing companies, is that it is not reflective of how the business is actually doing.

How so? Get specific, please. What company, what year, what issue?

Personally, I think the main problem these companies have is the management - particularly the founding management - doesn't like the shackles imposed on them when they went public. However, as I think I already said, I have no specific problem with non-GAAP statements. There are some rare occasions when they might help investors, and they almost certainly help management. But a public company still needs to show GAAP statements, and, if they're being honest, will explain carefully why their non-GAAP statements are better and what the differences are.

For me, I always start with the question as to whether management has integrity. If they don't, then accounting standards won't save you.

I agree. But then there's the next step. Once you have management with integrity, you need to know if the company is making money and how they're doing that. You can have the most honest management you can find, but they might not be very good at running a business. Financial statements help you answer that question. Accounting standards, whether GAAP or IFRS, help keep the accountants honest.

--Peter
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I don't see how a company can just decide to skip GAAP and...

So far as I know, no public company in the US gets to "skip GAAP". Some report what they consider more useful and meaningful non-GAAP numbers in addition.

If you are interested in specifics, Square's annual report (https://s27.q4cdn.com/311240100/files/doc_financials/2021/q2...) is a good example of GAAP not being very useful. They report several non-GAAP measures of performance.

-IGU-
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The point of the issue with GAAP is deducting as an expense the *granting* of the option, whether or not is is ever exercised. At that point, the company has spent no money, taken in no money, and the shareholders are not impacted since that only happens when the options are exercised.

But that's not true. Shareholders are certainly impacted.

We've already established that options have value. Those options could have been sold on the market and the money pocketed by the company. By giving those options to employees at no charge, they have cost the shareholders the money that could have been raised by selling the options.

In the grant, no cash goes anywhere.

Right. I addressed that above. The grant has value - value which was granted to the employee. If you disagree, feel free to give me any options you have been granted. Apparently you feel they have no value since no cash changed hands. That value could have been realized as cash. Instead, the value was realized by obtaining the services of the employee.

The exercise, if anything, brings cash *in* to the company.

While this is also true, it is incomplete. MORE money would have come into the company had the stock been sold on the open market. Assuming, of course, that the exercise price is below the current market price, which is the typical case. That is also a form of compensation to the employee. The employee purchased stock at a price less than it's current market value.

The whole point of GAAP is to create a uniform way of comparing company financials so that one knew that one was looking at an equivalent statement and not some statement where strange handling was distorting key elements.

Exactly.

Great idea, but if one creates a rule that systematically punishes companies that do something like use options as a part of their compensation

Don't you see? This statement is completely at odds with the one I quoted immediately above. The rule requiring expensing of options doesn't punish the company issuing the options. It makes their statements uniform with the one that doesn't issue options.

Consider this: One company pays it's employee $100,000 in cash. The other pays the employee $80,000 in cash and gives them an option that is valued at $20,000. Why should one report $100,000 of wages expense and the other report $80,000? They both compensated their employees the same amount. It is only the form of compensation that is different.

Or another example: One company pays it's employee $80,000 in cash plus a stock option. The other pays $100,000 in cash, but let's the employee buy the same stock option for $20,000 - which the employee does. How are these two companies in a different position after all of the transactions? They each are out $80,000 in cash and each have given the same stock option. Why would they be treated differently for accounting purposes?

--Peter
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If you are interested in specifics, Square's annual report is a good example of GAAP not being very useful.

First off, that is the second quarter report, not an annual report. Not terribly meaningful to the discussion, but needs to be pointed out.

Now, what are the adjustments they make to GAAP? Here you go: (page 22 of the PDF report)

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net
Income (Loss), and Diluted Adjusted Net Income (Loss) Per
Share (Adjusted EPS) are non-GAAP financial measures that
represent our net income (loss) and net income (loss) per
share, adjusted to eliminate the effect of share-based
compensation expenses; amortization of intangible assets;
gain or loss on revaluation of equity investments; bitcoin
impairment loss; and the gain or loss on the disposal of
property and equipment
, as applicable.

(Bolding mine)

So they've eliminated a boatload of expenses. Stock compensation. Amortization. Gain or loss on stock investments. Bitcoin losses. Disposal of equipment.

I'm going to be perfectly honest here. I can see a use for some of these adjustments. They can get you to the results of the core operations of the business. I've thoroughly expressed my opinion of stock comp, so i won't repeat it again. I'm OK with the stocks and bitcoin. Those are investments of cash not immediately needed in the business. We need to know those to judge management's overall effectiveness, but they aren't part of the core business. Amortization and disposal of equipment I'm a bit more concerned. It depends on what you are amortizing. Some amortization is OK to remove, some is not. Disposal of equipment is often a normal part of the business. The business needs equipment and that equipment has a finite (if sometimes a bit variable) life span. Getting rid of such equipment is a normal part of operations. If you've got a loss on the disposal of that equipment, it usually means you're not depreciating it fast enough or your not maintaining it properly so it didn't reach its expected life. I'm sure you can see how leaving that out could be abused by management.

I do find it interesting that the disclosure states pretty clearly they omit bitcoin losses but not gains. It's also interesting the the GAAP statements report an apparent net income from bitcoin even after the bitcoin impairment losses. Unfortunately, these are unaudited statements and they don't have any footnotes, so it's impossible to determine what is going on here. Perhaps that info would be found in the most recent annual report.

I'll repeat - I don't have a problem with just about any adjustment for internal management use. And I don't have a problem with some adjustments some of the time. But if you're an investor, stick to the GAAP statements, and then make only the adjustments management is suggesting that you also agree with.

--Peter

PS - If you agree with the stock compensation adjustment, I will have no pity on you if (or perhaps when) that decision comes home to roost.
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No public company "skips GAAP". They report GAAP because they have to and then add any non-GAAP discussion and figures they find meaningful.
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Get specific, please.

Any company with substantial stock based compensation. Imagine a company with revenue of 100, cost of sales 20, operating expenses 50, and stock-based compensation 30. They GAAP statement will show zero profit when, in fact, they are bringing in 30 profit.

But a public company still needs to show GAAP statements, and, if they're being honest, will explain carefully why their non-GAAP statements are better and what the differences are.

Have you ever looked at an SEC filing? They *have* to report GAAP and, if they also include non-GAAP, they always explain what is being excluded.
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We've already established that options have value. Those options could have been sold on the market and the money pocketed by the company.

In what universe. A company either issues stock or it doesn't. It never sells options. Options are an artifact of the market totally separate from the company.

MORE money would have come into the company had the stock been sold on the open market.

You talk like a company can issue stock with the same freedom they can pay a bill!

Your examples make no sense. First, as I have said repeatedly, the options cost the company nothing to issue so the company has spent $100,000 in one case and $80,000 in the other case. Secondly, the value to the grantee is often many times the face value at the time of the grant, potentially pennies on the dollar for early stage companies. That option with a $20,000 face value at time of grant could easily be worth $100,000 or more by the time it is exercised. I think here again you are confusing company stock option grants with options as traded on the market.
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So they've eliminated a boatload of expenses.

None of which were actual expenses.

They can get you to the results of the core operations of the business.

Exactly the point of non-GAAP reporting.
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A company either issues stock or it doesn't. It never sells options. Options are an artifact of the market totally separate from the company.

You keep focusing on cash and ignoring the bigger picture here. Option compensation is compensation. Compensation is an expense of the company.

Normally, at this point in a discussion like this, I’d say it’s time to agree to disagree. But I’m not going to do that this time. I believe you are wrong. No, I know you are wrong. But I also know that any further posting by me is a waste of my time and that of the board readership.

So I am done with this. I’ve made my point. I’ve shown why stock option compensation is required to be expensed by GAAP, and why ignoring that expense is an error. Feel free to do as you wish.

—Peter
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I do find it interesting that the disclosure states pretty clearly they omit bitcoin losses but not gains.

Bitcoin is integral to Square's operations. What they eliminate are impairment losses, which you find interesting only because you don't know about the accounting.

Bitcoin, due to GAAP rules being rather behind the times, is treated as an intangible asset. So if Bitcoin, being rather volatile, swings in value from $30,000 to $50,000 during the quarter, they have to value it at $30,000 (or less if it was ever less while they owned it). Anyway, the details are a bit more involved, but the upshot is that the GAAP accounting rules make them treat the Bitcoin as worth (potentially) substantially less than it is worth. This is stupid and misleading. And there can't be any gains other than real ones from accepting and selling Bitcoin, which GAAP handles just fine.

-IGU-
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You keep focusing on cash and ignoring the bigger picture here. Option compensation is compensation. Compensation is an expense of the company.

What about "good will"? That is something else the company does which doesn't cost anything. Are you also going to put a line item for it on the P&L?

Yes, options are a part of compensation, but they are not expense because they don't cost anything.

What kind of posting are you going to make if the option expires worthless because the option price is above market price?
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"Any company with substantial stock based compensation. Imagine a company with revenue of 100, cost of sales 20, operating expenses 50, and stock-based compensation 30. They GAAP statement will show zero profit when, in fact, they are bringing in 30 profit."

That's 'operating profit' which is fine to report.
But the balance sheet should show some line for something like 'non-operating liabilities'. I'm not convinced that the potential value of those options is easily calculated based on the market options, but it has some sort of value that needs to be accounted.

Apparently, any company can simply cut salaries by 20% and replace them with stock options and become more profitable whenever they want. Maybe they could just do it occasionally and manipulate the market?

We might as well use Chinese accounting... Nobody trusts that.
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What they eliminate are impairment losses, which you find interesting only because you don't know about the accounting.

And I don't know the accounting because the financial statements linked to earlier in the thread did not include footnotes which would explain the accounting.

Bitcoin is integral to Square's operations.

How so? Again, the financial statements didn't include footnotes, so its hard to determine the relevance. If they're simply accepting bicoin as payment and using it to pay expenses, I have a hard time calling that "integral". They could do the same thing in USD. My suspicion is that they're investing with bitcoin, but again, that takes the full footnotes to figure out what is going on.

Bitcoin, due to GAAP rules being rather behind the times, is treated as an intangible asset.

So what is bitcoin, then? It is an asset. And it is intangible. I'm guessing you suggest it be treated as foreign currency would be treated. I can see an argument for that. That would leave the company with currency translation/exchange gains and losses instead of impairment losses. The long term results are the same, although year-to-year timing will be different between the two.

the upshot is that the GAAP accounting rules make them treat the Bitcoin as worth (potentially) substantially less than it is worth.

I guess my opinion of bitcoin is going to show here. In a way, bitcoin is just another fiat currency - but one with some limits on it's creation. It's only as good as those backing the currency. Normally, that is some kind of country-state. USA. Japan. EU. South Africa. China. With bitcoin, its backed by the full faith and credit of ... what exactly? The blockchain? What makes currency valuable is the trust in those backing the currency. There is no one backing bitcoin.

As a shareholder or potential shareholder, I want to know if management is simply using bitcoin as a way to satisfy customer/vendor needs, or if they are investing in it. If it's just a form of payment, there will be daily (or nearly so) conversions to/from a more established currency, such as the USD. And perhaps a small (relative to cash in banks) holding simply due to the timing of bitcoin receipts, payments, and conversions. If management is investing in bitcoin, it needs to be accounted for as such, with impairment losses recognized like any other impairment of an investment.

--Peter
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Apparently, any company can simply cut salaries by 20% and replace them with stock options and become more profitable whenever they want. Maybe they could just do it occasionally and manipulate the market?


Of course you are assuming that employees would be OK with that. Options, generally, don't pay the rent for the wide population of employees. Options, generally, have vesting that spreads out over several years, while paychecks arrive every week or two.

Having been at both small and medium/large companies, some employees and potential new hires really love the idea of getting options and others do not. Those that do typically want to help the company do well/grow and want to share in the stock benefits. They are also aware that if the company does poorly, the options may expire worthless.

Part of the reason for the Silicon Valley boom over the past 40-50 years was that most high tech companies, to be competitive, provided options to most employees, not just the founders and top executives...IMO, this was a good thing.
When GAAP rules changed ~20 years ago companies mostly switched to a much smaller number of RSUs (restricted stock units) which meant that as they vested employees had to take ownership of them and had to pay taxes immediately on the fair market value at the time. Only if held and sold later would they really benefit from the appreciation. Meanwhile only the top executives tend to get options, which let them defer taxes to the future when they decide to exercise and only if the appreciation caused the stock price to go up. Back to founders and executives getting more of the pie.

Mike
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But the balance sheet should show some line for something like 'non-operating liabilities'.

Why a liability? The company will get paid if the options are exercised.

And forget about options in the market; they have no relationship to stock-based compensation.

Apparently, any company can simply cut salaries by 20% and replace them with stock options and become more profitable whenever they want.

That depends on the price of the options and the price of the stock. If the option grants are perceived as worthless because the company is doing poorly, then the management is likely to just quit.
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During the dot-com craze, folks looked at EBITA. "Sure they're losing money, but if you ignore, Interest, Taxes, and Amortization, they're in great shape." :-)

As far as options, while there's a debate on whether they cost the company money, it's clear they do dilute the shareholder's value, thus options need to be accounted for in someway. I'll leave it up to the experts on Fool to determine the best way.
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options need to be accounted for in someway.

To be sure ... but that doesn't mean they need to be reflected on the P&L.
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>options need to be accounted for in someway.

To be sure ... but that doesn't mean they need to be reflected on the P&L.

I don't have sufficient knowledge of corporate financial statements to be certain. I believe financial documents need be consistent. If the per share shareholder's equity is impacted, then the details of the impact should be visible on the documents which feed the per share shareholder's equity.
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I believe financial documents need be consistent.

Well, yes, that is the reason for mandating GAAP. But, this is not to say that every particular of current GAAP standards are optimum. Regardless, GAAP applies to the overall report. Some data is reported in tables, some in the Balance Sheet, some in the P&L. My point is that option grants have nothing to do with profit or loss and are certainly not an expense to the company and therefore they should be reported elsewhere. They are, in fact, reported elsewhere and with greater detail, so there is no need to include them in the P&L.
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