All of those hailing this as another nail in the coffin of paid content on the Internet should notice that what you paid for on CNN was content that was free on my cable channel.
This is clearly a broken business model. Why in their right mind would pay for what they can get for free.
On the other hand, I am more than willing to pay for content which is valuable, unique, and not available for free anywhere else.
For example, I (and many others) have a subscription to the discussion boards at The Motley Fool. It is well worth it.
If you dig a little deeper on this one, you will see that the cause of the revenue miss is due to currency flucations (the dollar moved the reverse of their hedges, strengthening).
What was important - and eye opening here - is that even with a miss on the revenue side, earnings were double what they were in the year ago quarter.
While you can't continually grow the bottom line (earnings), with a shrinking top line, it is positive and says something good when a company has robust earnings even in the face of declining revenues.
If you break down the revenues you find something interesting. Strong improvements in both Server products and XBox. Both of these are positives for Microsoft and are in line with their long-term directions.
I love Science Friday and To The Best of Our Knowledge, both available from Audible for a small fee, and they definitely make the time on the exercise cycle go quickly.
Also, I really enjoy working through language learning tapes.
All-in-all, though it costs you, Audible is the source for material. They have some great subscription plans, including one for a couple of books at a time.
You really need to read the following books, as you move up the chain:
1. The Pragmatic Programmer By Andrew Hunt and David Thomas
2. Pragmatic Version Control By Andrew Hunt and David Thomas
3. Pragmatic Unit Testing By Andrew Hunt and David Thomas
4. Pragmatic Project Automation By Mike Clark
5. Code Complete, 2nd Edition By Steve McConnell
6. Debugging The Development Process By Steve Maguire
7. Joel on Software By Joel Spolsky
8. Testing Computer Software By Cem Kaner, Jack Falk, Hung Quoc Nguyen
9.Managing the Testing Process By Rex Black
10. Lessons Learned in Software Testing By Cem Kaner, James Bach, and Bret Pettichord
11. Peopleware: Product Projects and Teams By Tom DeMarco & Timothy Lister
I also second, The Mythical Man Month by Brooks.
Some said that you can't learn anything from books. I just don't buy it. You can learn a lot from the mistakes and successes of others. Just like a great coach looks at films of other teams (learning from their mistakes and successes), you can do the same.
Take time to read books written by those who have been in the trenches and apply the lessons learned.
He takes a position, quite contrary to what is popular on Slashdot, concerning how we should embrace and use these technologies.
For example, he argues - quite convinceingly - that we should embrace monitoring cameras in public spaces. But that in doing so, we should give everyone in our society access to the feeds and that the inside of the monitoring center should be subject to public monitoring.
Having seen how privacy laws are being used in the public square to frustrate transparency and good goverance, I find myself powerfully attracted by Brin's arguments.
Examples of abuse of privacy laws I have seen that stick in my craw are:
1. When a public agency - prison, foster care, etc. - is challenged on its conduct, and the person whose privacy is supposedely being protected has gone public, we will hear, "We can't discuss that due to privacy protections."
This action closes off any meaningful debate of the practices in place.
2. Here in California, a number of challenges are underway to the practice of not releasing public employees compensation or contracts due to privacy laws.
In general, I approve of Joel's recommendations in this essay. That said, I would make a couple of additions:
1. Take an introduction to finance Learn how to read and know the differences in a financial statement including a balance sheet, an income statement, and a cash flow statement. Learn the differences between operating and capital expenses. Learn how the income statement can say you are making a profit, when the cash flow for the period is negative!
Finance (along with the law) are the programming languages for the operating system called business. If you understand them, you can hack them just fine!
2. Take an introduction to business law Learn what is and isn't a contract. Learn what a tort is. Learn the differences between a patent, a copyright, and a trademark.
The Legal System (for good or for ill) has a tremendous influence on our lives. Being illiterate in the law can result in self-inflicted wounds!
H1-B Visa holders aren't immigrants though. I wish that they were.
Many H1-B Visa holders are aspiring immigrants, rather than "guest workers". For those we aren't lucky enough to qualify for an immigrant visa and Green Card under the family reunification rules or one of the lucky few that wins one in the annual lottery, the only path to a Green Card is through the H1-B Visa.
I have or have had four employees on H1-Bs. Each and every one, when the opportunity has come up, have asked me to petition for them to get a Green Card. In most cases it took all of the time available on an H1-B, including extensions, to get to the head of the line to get a Green Card.
And once they had the Green Card and had put in the time, they have chosen to petition for citizenship.
I would sure say that these folks are immigrants and aspiring citizens.
The great crime of US immigration policy is our emphasis on family reunification to the exclusion of all else. Unlike Canada, who balances the two, we let very few people, as a percentage of total immigration, come in based on the skills and expertise and talents they will bring to the US.
In general, operating expenses such as salary, etc. can't be amortized.
Now, if I buy a software company anything I pay over book value for that company (book value is assets minus liabilities, i.e. what you would get if you ripped the company apart and sold it) is counted as either "good will" or, in the case of technology companies, "in process R&D".
In process R&D is now required to be depreciated according to GAAP (Generally Accepted Accounting Principals) as defined by FASB(Financial Accounting Standards Board). This wasn't the case when Apple acquired NeXT, and because of this, Apple took a big charge (I believe it was 410 million), which reduced current earnings, but freed up future earnings. Today, they would have to spread that 410 million over several years and would have reduced earnings (but not cash flow) going forward.
As one of those techies who speaks fluent C++ and Finance, has a little grey in his hair (no beard here), and loves being home with my family at the beginning and end of the day, I definitely appreciate the experienced folks and don't feel that I own them....:-)
I do know how to run a Google search, and probably should have done so, but calling someone an "Idiot" for not doing so, doesn't show much decency or consideration for your fellow man.
No, the reason that I can't spend $10K on a contractor vs. $120K on a server is due to the difference between an operating expense and a capital expense.
While both expenses have the same impact on cash flow in a given month (how much money flows into or out of the company), they have very different impacts on the P&L.
An operating expense has to be realized fully during the operating period in which the benefit is seen, while a capital expense is amortized over the useful life of the item in question (in this case I assumed 48 months).
As an employee of a publicly traded company C Corp (think of it as a vanilla corporatioN), I have to examine the impact that my spending decisions have on the income statement.
Now, if I worked for an LLC (publicly traded or otherwise) the logic would be completely backwards of that I face in a C Corp. It would be my goal - for tax purposes - to maximize operating expenses, because as a flow-through vehicle, profits or losses (for tax purposes) flow through to my shareholders and they want to see losses on their 1040 each and every year.
By the way, you might not know this, but publicly traded companies legally keep two sets of books: one for reporting to shareholders and another for tax purposes, and for tax purposes an operating expense is preferred over a capital expense, but for reporting purposes a capital expense is preferred to a capital expense.
Thanks for the education. I appreciate it. But the larger comment I made applies, and it doesn't make me an idiot. I was ignorant on this subject. And I accept the education that you gave me.
Denigrating the man, because he has an MPA (or if it had been an MBA), is the kind of reverse snobbery (if they ain't a techie, they ain't shit) that we see too much of on SlashDot.
What the heck is an MPA? I think you mean that O'Keefe is an MBA.
Just because someone is a professional manager, doesn't mean that they can't manage a technical or scientific organization
Remember that the Manhatten Project was lead to success by General Leslie R. Groves http://en.wikipedia.org/wiki/Leslie_Groves, who while also an engineer, who was the moral equivalent of an MBA. Yes, they wouldn't have gotten their without the techies like Feyman, Fermi, or Oppenheimer, but they also wouldn't have gotten their without Groves.
As an engineering manager who can hack a compiler as well as I can hack an operating plan or rolling four quarter outlook, I am distressed by the number of techies who can't (and don't care they can't) understand the difference between an operating and capital expenses (and why I can't spend 10K this month on a contractor, but I can spend 120K on a new server setup that has an expected life of 36 months).
You might not like it, but finance and accounting are the way score is kept and things are communicated in the world of business. An engineer or engineering manager who can't speak this language is at as big a disadvantage as the techie who can't program.
I just want to put the following quote: The survivors have been minimally compensated, but as time passes, enough of them have died that compensation may now be in the works. in the context of the Indian Legal system.
The Indian Legal system is notorious for the lack of speed with which the wheels of justice turn. Even for the smallest cases ten years from filing to final disposition is not unusual.
I recently read an article which discussed several cases from the 1950s that is still in the courts and still being fought.
I believe that this collection will be very useful to folks that are trying to see 1) what has been done and why it failed, 2) what assumptions (founded or unfounded were made), and 3) what want to see what failed but might work now.
Unfortunately, the study of history - in any form - is very underrated in the current global culture and in American culture specifically. It is suprising to me the number of folks that feel history is 1) uninteresting, 2) irrelevnat, and 3) useless.
I will be registering for this site (and for those of you that refuse to register, TANSTAAFL), and exploring what it makes available. I think I will learn a lot.
And if you don't buy any of my arguments above, just remind yourself that this is a collection of the business plans that got funded by VCs. It can't hurt to look at them and use them as models if you are seeking VC funding someday for your idea.
What Christen has demonstrated in his research, is that innovative companies have an unfortunate tendency to hold onto their existing business and an unwillingness to "eat their own young".
While this doesn't lead to an immediate collapse, it does impact them negatively and once the downward spiral starts, it can go very fast.
As someone who has read much of Christensen's work, I am not surprised that he would make this suggestion (and I agree with it), but I am excited to see it out in public...
I agree with him that the greatest threat that Microsoft faces is the unwillingness to destroy its existing business to create a new business.
Why won't Microsoft bring Office to Linux? Because that would undercut the Windows business.
Why hasn't Microsoft gone ahead with a truly revolutionary approach to a MediaPlayer or Handheld? Because that would undercut the Windows business.
It is about keeeping the Windows business going. Think about it, how many differnet flavors of "Windows" have we seen for totally different uses and platforms?
My reading of the DOJ arguments is that such activity, Patriot Act aside, would require a warrant for the FBI/NSA/etc., as much as it would for anyone else.
With the tinfoil hat paranoia running at all time highs, it is interesting to note it was the DOJ, not the EFF or ACLU, that asked the full Appeals Court to reconsider this decision.
I guess that the nasty, civil rights stomping Ashcroft DOJ feels that wiretap laws apply in this situation. Curious.
Actually, I know it is serious. But it is bordering on the absurd.
If my management wants me to work remotely on company business outside of normal business hours, then they better pay for my broadband and the other tools required to do my job.
Now, if I want to work remotely (i.e. telecommute) during normal business hours, then I should be willing to pay for the infrastructure and services to do so. Just like I pay for the cost of transport to get to work, I should be willing to pay for my telecommute.
Except that expensing doesn't give an accurate calculation of the cost of an option. The impact of exercising (not granting, which is when FASB wants the calculation to be done) is shareholder dilution. This isn't a good thing, but expensing doesn't reflect with any accuracy or congrugency to reality the impact of shareholder dilution.
By forcing them disclose the impact of both dilution through reporting a diluted number as the "real earnings" and by detailing the full set of option grants, strike price, and term, you can get all the information required to work this one.
Yes, you are correct NineNine, that their is a tax benefit. The only thing, is that tax benefit doesn't occur until the option is exercised, whereas the expense is to be recorded at the time of grant.
I believe that the drive to force the expensing of options is rooted in a valid concern: currently, the impact of options on shareholders isn't properly disclosed.
That said, expensing doesn't address the real issue correctly.
What happens when an option is issued, from a financial point of view, is absolutely nothing. No expense is incured, no income is acrued, no increase in the share count occurs. It is a big zero from a financial point of view.
But yet FASB, wants to force a calculation of expense to be made that may or may not have any ultimate connection to reality and then to have that expense charged against the company in question's earnings in that quarter.
When an option is granted, the only material thing that happens is that a potential obligation to sell charges at a set amount over a set period of time is created. This leads to the possibility that the ownership "pie" of a company may be sliced into some larger number of smaller pieces.
When an option is exercised, a few things happen. First, off the company gets an infusion of capital equal to the option grant price times the number of shares granted in the option. Second, the existing owners of the company (read shareholders) see their ownership interest decreased due to the additional shares that have been issued.
Let me illustrate the above points: if a company has 100 shares outstanding, and I am given and then exercise an option to purchase 100 shares at $10 a share, then the following happens. First, the company gets $1,000 (100x10 = 1000) in additional capital. Second, the existing shareholders see their interest in the company cut in half. Whereas, prior to my exercise of the options, they had 100 shares and owned 100% of the company, they know own 100 shares and own 50% of the company. This is called dilution.
How would I address the legitimate concern for clearly and transparently communicating the potential impact of option grants on a company? Well, I would require that the earnings per share number be reported as if all option grants currently outstanding were exercised.
Currently, companies report a diluted earnings number, but it isn't "the offical" number. Let's make the diluted earnings number the offical one.
This is better than expensing for a couple of reasons. First, expensing only shows the impact in one quarter. It doesn't show the true impact of options being exercised, which goes on and on and on. Second, expensing is an estimate. There is no accurate way to estimate the "cost" of an option grant. Both of these points should be a deal breaker for any accountant. Accounting has at its bottom line rule that first, the number be accurate. This includes that expenses should be matched against the events that generate them. An option grant doesn't an impact, it only has a potential impact.
Slashdot Mirror
All of those hailing this as another nail in the coffin of paid content on the Internet should notice that what you paid for on CNN was content that was free on my cable channel.
This is clearly a broken business model. Why in their right mind would pay for what they can get for free.
On the other hand, I am more than willing to pay for content which is valuable, unique, and not available for free anywhere else.
For example, I (and many others) have a subscription to the discussion boards at The Motley Fool. It is well worth it.
Yours,
Jordan
If you dig a little deeper on this one, you will see that the cause of the revenue miss is due to currency flucations (the dollar moved the reverse of their hedges, strengthening).
What was important - and eye opening here - is that even with a miss on the revenue side, earnings were double what they were in the year ago quarter.
While you can't continually grow the bottom line (earnings), with a shrinking top line, it is positive and says something good when a company has robust earnings even in the face of declining revenues.
If you break down the revenues you find something interesting. Strong improvements in both Server products and XBox. Both of these are positives for Microsoft and are in line with their long-term directions.
Yours,
Jordan
I love Science Friday and To The Best of Our Knowledge, both available from Audible for a small fee, and they definitely make the time on the exercise cycle go quickly.
Also, I really enjoy working through language learning tapes.
All-in-all, though it costs you, Audible is the source for material. They have some great subscription plans, including one for a couple of books at a time.
Yours,
Jordan
You really need to read the following books, as you move up the chain:
1. The Pragmatic Programmer
By Andrew Hunt and David Thomas
2. Pragmatic Version Control
By Andrew Hunt and David Thomas
3. Pragmatic Unit Testing
By Andrew Hunt and David Thomas
4. Pragmatic Project Automation
By Mike Clark
5. Code Complete, 2nd Edition
By Steve McConnell
6. Debugging The Development Process
By Steve Maguire
7. Joel on Software
By Joel Spolsky
8. Testing Computer Software
By Cem Kaner, Jack Falk, Hung Quoc Nguyen
9.Managing the Testing Process
By Rex Black
10. Lessons Learned in Software Testing
By Cem Kaner, James Bach, and Bret Pettichord
11. Peopleware: Product Projects and Teams
By Tom DeMarco & Timothy Lister
I also second, The Mythical Man Month by Brooks.
Some said that you can't learn anything from books. I just don't buy it. You can learn a lot from the mistakes and successes of others. Just like a great coach looks at films of other teams (learning from their mistakes and successes), you can do the same.
Take time to read books written by those who have been in the trenches and apply the lessons learned.
Yours,
Jordan
I definitely see problems with this one. I firmly believe that if you are in public, you are fair game.
That is why I don't have problems with the use of video cameras by the police, etc., in public spaces to monitor activities there.
I firmly agree with David Brin http://www.davidbrin.com/, who said in The Transparent Society http://www.davidbrin.com/privacyarticles.html#ts that we face stark choices about privacy and transparency.
He takes a position, quite contrary to what is popular on Slashdot, concerning how we should embrace and use these technologies.
For example, he argues - quite convinceingly - that we should embrace monitoring cameras in public spaces. But that in doing so, we should give everyone in our society access to the feeds and that the inside of the monitoring center should be subject to public monitoring.
Having seen how privacy laws are being used in the public square to frustrate transparency and good goverance, I find myself powerfully attracted by Brin's arguments.
Examples of abuse of privacy laws I have seen that stick in my craw are:
1. When a public agency - prison, foster care, etc. - is challenged on its conduct, and the person whose privacy is supposedely being protected has gone public, we will hear, "We can't discuss that due to privacy protections."
This action closes off any meaningful debate of the practices in place.
2. Here in California, a number of challenges are underway to the practice of not releasing public employees compensation or contracts due to privacy laws.
Yours,
Jordan
In general, I approve of Joel's recommendations in this essay. That said, I would make a couple of additions:
1. Take an introduction to finance
Learn how to read and know the differences in a financial statement including a balance sheet, an income statement, and a cash flow statement. Learn the differences between operating and capital expenses. Learn how the income statement can say you are making a profit, when the cash flow for the period is negative!
Finance (along with the law) are the programming languages for the operating system called business. If you understand them, you can hack them just fine!
2. Take an introduction to business law
Learn what is and isn't a contract. Learn what a tort is. Learn the differences between a patent, a copyright, and a trademark.
The Legal System (for good or for ill) has a tremendous influence on our lives. Being illiterate in the law can result in self-inflicted wounds!
Yours,
Jordan
H1-B Visa holders aren't immigrants though. I wish that they were.
Many H1-B Visa holders are aspiring immigrants, rather than "guest workers". For those we aren't lucky enough to qualify for an immigrant visa and Green Card under the family reunification rules or one of the lucky few that wins one in the annual lottery, the only path to a Green Card is through the H1-B Visa.
I have or have had four employees on H1-Bs. Each and every one, when the opportunity has come up, have asked me to petition for them to get a Green Card. In most cases it took all of the time available on an H1-B, including extensions, to get to the head of the line to get a Green Card.
And once they had the Green Card and had put in the time, they have chosen to petition for citizenship.
I would sure say that these folks are immigrants and aspiring citizens.
The great crime of US immigration policy is our emphasis on family reunification to the exclusion of all else. Unlike Canada, who balances the two, we let very few people, as a percentage of total immigration, come in based on the skills and expertise and talents they will bring to the US.
Yours,
Jordan
Hi Dasein -
In general, operating expenses such as salary, etc. can't be amortized.
Now, if I buy a software company anything I pay over book value for that company (book value is assets minus liabilities, i.e. what you would get if you ripped the company apart and sold it) is counted as either "good will" or, in the case of technology companies, "in process R&D".
In process R&D is now required to be depreciated according to GAAP (Generally Accepted Accounting Principals) as defined by FASB(Financial Accounting Standards Board). This wasn't the case when Apple acquired NeXT, and because of this, Apple took a big charge (I believe it was 410 million), which reduced current earnings, but freed up future earnings. Today, they would have to spread that 410 million over several years and would have reduced earnings (but not cash flow) going forward.
As one of those techies who speaks fluent C++ and Finance, has a little grey in his hair (no beard here), and loves being home with my family at the beginning and end of the day, I definitely appreciate the experienced folks and don't feel that I own them....:-)
Yours,
Jordan
I do know how to run a Google search, and probably should have done so, but calling someone an "Idiot" for not doing so, doesn't show much decency or consideration for your fellow man.
Yours,
Jordan
No, the reason that I can't spend $10K on a contractor vs. $120K on a server is due to the difference between an operating expense and a capital expense.
While both expenses have the same impact on cash flow in a given month (how much money flows into or out of the company), they have very different impacts on the P&L.
An operating expense has to be realized fully during the operating period in which the benefit is seen, while a capital expense is amortized over the useful life of the item in question (in this case I assumed 48 months).
As an employee of a publicly traded company C Corp (think of it as a vanilla corporatioN), I have to examine the impact that my spending decisions have on the income statement.
Now, if I worked for an LLC (publicly traded or otherwise) the logic would be completely backwards of that I face in a C Corp. It would be my goal - for tax purposes - to maximize operating expenses, because as a flow-through vehicle, profits or losses (for tax purposes) flow through to my shareholders and they want to see losses on their 1040 each and every year.
By the way, you might not know this, but publicly traded companies legally keep two sets of books: one for reporting to shareholders and another for tax purposes, and for tax purposes an operating expense is preferred over a capital expense, but for reporting purposes a capital expense is preferred to a capital expense.
Yours,
Jordan
Hi -
Thanks for the education. I appreciate it. But the larger comment I made applies, and it doesn't make me an idiot. I was ignorant on this subject. And I accept the education that you gave me.
Denigrating the man, because he has an MPA (or if it had been an MBA), is the kind of reverse snobbery (if they ain't a techie, they ain't shit) that we see too much of on SlashDot.
Yours,
Jordan
What the heck is an MPA? I think you mean that O'Keefe is an MBA.
Just because someone is a professional manager, doesn't mean that they can't manage a technical or scientific organization
Remember that the Manhatten Project was lead to success by General Leslie R. Groves http://en.wikipedia.org/wiki/Leslie_Groves, who while also an engineer, who was the moral equivalent of an MBA. Yes, they wouldn't have gotten their without the techies like Feyman, Fermi, or Oppenheimer, but they also wouldn't have gotten their without Groves.
As an engineering manager who can hack a compiler as well as I can hack an operating plan or rolling four quarter outlook, I am distressed by the number of techies who can't (and don't care they can't) understand the difference between an operating and capital expenses (and why I can't spend 10K this month on a contractor, but I can spend 120K on a new server setup that has an expected life of 36 months).
You might not like it, but finance and accounting are the way score is kept and things are communicated in the world of business. An engineer or engineering manager who can't speak this language is at as big a disadvantage as the techie who can't program.
Yours,
Jordan
I just want to put the following quote: The survivors have been minimally compensated, but as time passes, enough of them have died that compensation may now be in the works. in the context of the Indian Legal system.
The Indian Legal system is notorious for the lack of speed with which the wheels of justice turn. Even for the smallest cases ten years from filing to final disposition is not unusual.
I recently read an article which discussed several cases from the 1950s that is still in the courts and still being fought.
Yours,
Jordan Dea-Mattson
"That is, the plant was in the business of creating chemicals deadly to life.", so was this the disaster at the disinfectant or antibiotic plant?
I believe that this collection will be very useful to folks that are trying to see 1) what has been done and why it failed, 2) what assumptions (founded or unfounded were made), and 3) what want to see what failed but might work now.
Unfortunately, the study of history - in any form - is very underrated in the current global culture and in American culture specifically. It is suprising to me the number of folks that feel history is 1) uninteresting, 2) irrelevnat, and 3) useless.
I will be registering for this site (and for those of you that refuse to register, TANSTAAFL), and exploring what it makes available. I think I will learn a lot.
And if you don't buy any of my arguments above, just remind yourself that this is a collection of the business plans that got funded by VCs. It can't hurt to look at them and use them as models if you are seeking VC funding someday for your idea.
Yours,
Jordan
Hi Dante -
What Christen has demonstrated in his research, is that innovative companies have an unfortunate tendency to hold onto their existing business and an unwillingness to "eat their own young".
While this doesn't lead to an immediate collapse, it does impact them negatively and once the downward spiral starts, it can go very fast.
Yours,
Jordan
As someone who has read much of Christensen's work, I am not surprised that he would make this suggestion (and I agree with it), but I am excited to see it out in public...
I agree with him that the greatest threat that Microsoft faces is the unwillingness to destroy its existing business to create a new business.
Why won't Microsoft bring Office to Linux? Because that would undercut the Windows business.
Why hasn't Microsoft gone ahead with a truly revolutionary approach to a MediaPlayer or Handheld? Because that would undercut the Windows business.
It is about keeeping the Windows business going. Think about it, how many differnet flavors of "Windows" have we seen for totally different uses and platforms?
Yours,
Jordan
Hi Delta -
That is exactly what it means.
You will notice that Google Print (and A9) have worked to secure the rights to put copyrighted materials in their databases.
Yours,
Jordan
Hi Chris -
My reading of the DOJ arguments is that such activity, Patriot Act aside, would require a warrant for the FBI/NSA/etc., as much as it would for anyone else.
Yours,
Jordan
All -
With the tinfoil hat paranoia running at all time highs, it is interesting to note it was the DOJ, not the EFF or ACLU, that asked the full Appeals Court to reconsider this decision.
I guess that the nasty, civil rights stomping Ashcroft DOJ feels that wiretap laws apply in this situation. Curious.
Yours,
jordan
This isn't serious, is it?
Actually, I know it is serious. But it is bordering on the absurd.
If my management wants me to work remotely on company business outside of normal business hours, then they better pay for my broadband and the other tools required to do my job.
Now, if I want to work remotely (i.e. telecommute) during normal business hours, then I should be willing to pay for the infrastructure and services to do so. Just like I pay for the cost of transport to get to work, I should be willing to pay for my telecommute.
Yours,
Jordan
Hi Nigle -
Except that expensing doesn't give an accurate calculation of the cost of an option. The impact of exercising (not granting, which is when FASB wants the calculation to be done) is shareholder dilution. This isn't a good thing, but expensing doesn't reflect with any accuracy or congrugency to reality the impact of shareholder dilution.
Yours,
Jordan
By forcing them disclose the impact of both dilution through reporting a diluted number as the "real earnings" and by detailing the full set of option grants, strike price, and term, you can get all the information required to work this one.
Yes, you are correct NineNine, that their is a tax benefit. The only thing, is that tax benefit doesn't occur until the option is exercised, whereas the expense is to be recorded at the time of grant.
Yours,
Jordan
I believe that the drive to force the expensing of options is rooted in a valid concern: currently, the impact of options on shareholders isn't properly disclosed.
That said, expensing doesn't address the real issue correctly.
What happens when an option is issued, from a financial point of view, is absolutely nothing. No expense is incured, no income is acrued, no increase in the share count occurs. It is a big zero from a financial point of view.
But yet FASB, wants to force a calculation of expense to be made that may or may not have any ultimate connection to reality and then to have that expense charged against the company in question's earnings in that quarter.
When an option is granted, the only material thing that happens is that a potential obligation to sell charges at a set amount over a set period of time is created. This leads to the possibility that the ownership "pie" of a company may be sliced into some larger number of smaller pieces.
When an option is exercised, a few things happen. First, off the company gets an infusion of capital equal to the option grant price times the number of shares granted in the option. Second, the existing owners of the company (read shareholders) see their ownership interest decreased due to the additional shares that have been issued.
Let me illustrate the above points: if a company has 100 shares outstanding, and I am given and then exercise an option to purchase 100 shares at $10 a share, then the following happens. First, the company gets $1,000 (100x10 = 1000) in additional capital. Second, the existing shareholders see their interest in the company cut in half. Whereas, prior to my exercise of the options, they had 100 shares and owned 100% of the company, they know own 100 shares and own 50% of the company. This is called dilution.
How would I address the legitimate concern for clearly and transparently communicating the potential impact of option grants on a company? Well, I would require that the earnings per share number be reported as if all option grants currently outstanding were exercised.
Currently, companies report a diluted earnings number, but it isn't "the offical" number. Let's make the diluted earnings number the offical one.
This is better than expensing for a couple of reasons. First, expensing only shows the impact in one quarter. It doesn't show the true impact of options being exercised, which goes on and on and on. Second, expensing is an estimate. There is no accurate way to estimate the "cost" of an option grant. Both of these points should be a deal breaker for any accountant. Accounting has at its bottom line rule that first, the number be accurate. This includes that expenses should be matched against the events that generate them. An option grant doesn't an impact, it only has a potential impact.
Yours,
Jordan