Random Notes
Proceeds from the vesting (exercise) of employee stock options become a liability upon the company and this has a direct impact on operating expenses, and subsequently on the bottom line.
To fulfill their liability to the worker the company will do either one of two things:
1. Issue a new share (therefore diluting earnings and existing shareholders equity).
2. Go into the open market and repurchase shares which are then given the employee who can either hold onto them or sell them immediately (fairly similar to the manner in which in-the-money exchange traded (public) options are exercised upon expiration.
A slightly deceptive result of the second scenario is that is gives the appearance to the public investors that the company is engaged in large amounts of share repurchase programs whereas the shares are only being repurchased to fulfill the contingent liability towards the workers’ options sales. (Usually glancing over the footnotes in the financials will provide more clarity over such matters.)
Share buybacks by a company have the effect of making a company’s EPS appear larger without the company having earned more. Therefore, earnings figures should be used rather than EPS. For example, if a company buys back 1% of outstanding stock on the open market in each of it’s first three quarter – all else being equal – fourth quarter EPS will increase by 3%. However, the earnings will, in reality, have not changed. Hence the necessity to rely more on the net income figure than EPS.
After the passing of the new FASB regulation in 2005, however, such matters will become much more transparent, and it will become less easy for company accountants to hide such matters in the footnotes.
The S&P says the impact of the new FASB rule will be felt most in the “in the Information Technology sector, where unexpensed option cost would have reduced as-reported by 19.19% and operating by 17.79%.”
To fulfill their liability to the worker the company will do either one of two things:
1. Issue a new share (therefore diluting earnings and existing shareholders equity).
2. Go into the open market and repurchase shares which are then given the employee who can either hold onto them or sell them immediately (fairly similar to the manner in which in-the-money exchange traded (public) options are exercised upon expiration.
A slightly deceptive result of the second scenario is that is gives the appearance to the public investors that the company is engaged in large amounts of share repurchase programs whereas the shares are only being repurchased to fulfill the contingent liability towards the workers’ options sales. (Usually glancing over the footnotes in the financials will provide more clarity over such matters.)
Share buybacks by a company have the effect of making a company’s EPS appear larger without the company having earned more. Therefore, earnings figures should be used rather than EPS. For example, if a company buys back 1% of outstanding stock on the open market in each of it’s first three quarter – all else being equal – fourth quarter EPS will increase by 3%. However, the earnings will, in reality, have not changed. Hence the necessity to rely more on the net income figure than EPS.
After the passing of the new FASB regulation in 2005, however, such matters will become much more transparent, and it will become less easy for company accountants to hide such matters in the footnotes.
The S&P says the impact of the new FASB rule will be felt most in the “in the Information Technology sector, where unexpensed option cost would have reduced as-reported by 19.19% and operating by 17.79%.”
posted by Raphael Blogger at
9:29 AM
