Now who's doing 'the Hustle' with options?In his recent editorial, "Doing 'the Hustle' with options," (Accounting Today May 16-June 5, 2005, page 6) Bill Carlino stated that he dislikes "retro flashbacks" and things of the 1970s. He argues that the Financial Accounting Standards Board must dislike today's Securities and Exchange Commission interference in Rule 123R regarding options, as FASB presumably disliked the last major SEC interference regarding oil and gas accounting in the 1970s.
But is it the SEC and anti-expensing groups that are dragging us back to the future, or is it FASB? Arguably, it is FASB that is wearing the bellbottoms.
Equity-based expensing began an estimated 50 years ago - before the concept of present value was widely accepted.
FASB's 123R is simply extending the decades-old practice of equity-based expensing. But is this correct? Does it serve investors?
Skipping over the cringe-inducing 1970s, consider the time when the railroads were the primary economic engine of this country, in the mid- to late-1800s. At that time, the balance sheet was the primary financial statement. Needing more information, investors demanded accounting numbers that would tell them what financial returns companies were yielding. This resulted in the development of the income statement and, eventually, the earnings-per-share calculation in the 1920s. Investors primarily wanted to know "earning power," and accordingly accounting developed its "going concern" orientation. The result and expectation was that valid earnings would repeat if the status quo were maintained.
Today, when book value is a fraction of market capitalization, the act of expensing equity-based compensation yields EPS values that are not reflective of earning power. This is easily demonstrated by considering a company that repeats its actions of a given period and obtains the same net income, only to report ever-more diminished EPS because of ever-more shareholder dilution.
A solution to this problem entails re-embracing the "going concern" orientation, and restoring the goal of creating income statements and EPS that consistently and accurately estimate "earning power." This can be achieved by modeling a scenario entailing a company's perpetually repeating the current period, tracking the interests of the existing shareholders, and then converting the results to EPS. Such earnings validly estimate what the company is currently doing for the existing shareholders.
If FASB would quit doing "the Hustle" by using a flawed paradigm of expensing equity-based compensation of several decades ago, then perhaps innovative solutions will emerge that serve investors and address the concerns of those against expensing. Until that happens, or Congress steps in, our accounting rules will feel more like we are regressing backward, rather than moving forward, into the 21st century.
Joel Jameson
FairTax is more than fair
I just recently read "Is a consumption tax the answer?" (Accounting Today, April 4-17, 2005, page 1) and would like to simply say this: Yes, it is.
What the opponents of the FairTax have failed to mention is that everyone will pay the exact same tax rate on all new goods and services. That means that the big-time drug dealer down the block will be forced to pay taxes on his illegal income. The same goes for all the illegal residents that are working under the table, as well as all foreign visitors to the U.S. That is a lot of money that has heretofore been uncollectable.
Additionally, Americans will be rebated monthly under the FairTax plan for all tax up to the federal poverty level - that amounts to an annual consumption allowance of approximately $22,500 per year for the average family of four with over $5,100 in rebates.
Now, does that sound like a plan that will slow down spending? Quite the contrary. If Americans have more money in their pockets, most will want to spend it on something. If one wants to avoid paying sales tax, then buy used instead of new, since the FairTax is only paid on new goods and services.
I believe that the FairTax is good for Americans, good for America, good for the government. It's good for everyone.
Tim Clark
Glenburn, Maine
In "Is a consumption tax the answer?" (Accounting Today April 4-17, 2005), author Gail Perry neglected to point out two important facts about the FairTax.
One is that in repealing the income tax, the FairTax also cuts 20 percent to 30 percent from present retail prices. These are the embedded cost of employee taxes that retailers and manufacturers pass along to the consumer.
The other point is that everyone, not just the poor, gets the $178 prebate, so that no one (not even children) pays a tax on things that they buy, up to the poverty level.
The National Retail Sales Federation hasn't studied the benefits to its retailers, who would get a percentage of the tax as compensation for collecting it. Their assumption that consumers would stop spending is downright silly. People have to buy food, shelter and clothing, and the more they have to spend, the more they spend on those items. The wealthy, for example, buy a Lexus instead of a Kia and mansions instead of homes. They wear Vera Wang instead of J.C. Penney brands, and therefore pay more for the goods they buy.
A consumption tax on top of an income tax is a disaster, as France, Germany and the U.K. show. The FairTax, however, repeals the income tax, cuts prices, gives everyone a rebate, and broadens the tax base to include the $350 billion that the IRS says it can't touch.
To oppose an opportunity like the one the FairTax offers is downright un-American!
Sunnye Tiedemann
Overland Park, Kan.
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