Volume 6, No. 5

 

Heads Up! The New Stock Compensation Disclosures - Accounting Matters For Analysts In 1996 Annual Reports Part II:  Investors will be facing new information in 1996 annual reports - information about the value of stock compensation granted to employees and managements in the past several years. This will be contained in the annual report footnotes for most companies; one must hunt for it to use it. Statement of Financial Accounting Standards No. 123 governs this new information, and because of its transition requirements, the information may be somewhat incomplete and misleading. If companies don't "take stock" of their earnings with the preferable accounting provided by this statement, they are required to present pro forma earnings and earnings per share that give effect to the expense recognition of stock compensation. There will be a fair number of companies that will not be reporting this pro forma information, dismissing it on the grounds that the difference between pro forma and the reported income is immaterial. Analysts should be mindful that this is only a temporary condition. Because of the way the transition requirements work, the "immateriality clause" is less likely to be an excuse in the future.

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