Stock based compensation treatment

[benchmark]

How is SBC generally treated in the cash flow statement? 

 

https://finance.yahoo.com/quote/MDB/cash-flow?p=MDB

 

For example, this shows an operating cashflow of $53.7 million, but has a negative net income from operation of -$54.2 million. The only reason that the cash flow is positive is that they took about $103million of SBC and counted that as operating cash flow? 

 

I'm curious on if this is standard, and what other ways companies account for SBC? 

[Spekulatius]

4 hours ago, benchmark said:

How is SBC generally treated in the cash flow statement? 

 

https://finance.yahoo.com/quote/MDB/cash-flow?p=MDB

 

For example, this shows an operating cashflow of $53.7 million, but has a negative net income from operation of -$54.2 million. The only reason that the cash flow is positive is that they took about $103million of SBC and counted that as operating cash flow? 

 

I'm curious on if this is standard, and what other ways companies account for SBC? 

Yes, SBC is a no cash expense, so in most tech companies, with little Capex, the difference between the GAAP income and the FCF  statement is SBC. Sometimes there is amortization of intangibles and some cash expenses, depending on if the companies pay the employees taxes on SBC gains or not. 

[benchmark]

5 hours ago, Spekulatius said:

Yes, SBC is a no cash expense, so in most tech companies, with little Capex, the difference between the GAAP income and the FCF  statement is SBC. Sometimes there is amortization of intangibles and some cash expenses, depending on if the companies pay the employees taxes on SBC gains or not. 

In this case, the net operating income is negative, but how can they treat SBC as positive cashflow in the cashflow statement? 

Edited June 6, 2023 by benchmark

[KJP]

1 minute ago, benchmark said:

In this case, the net income is negative, but how can they treat SBC as positive cashflow in the cashflow statement? 

 

The cash flow statement starts with net income and then has various entries that reconcile income statement entries to actual cash flows.  The income statement included an employee compensation expense related to the stock option compensation, probably calculated via Black-Scholes.  That income statement expense did not involve actual cash being paid out.  So, the amount of that expense is added back in the cash flow statement.

 

In other words, what the operating section of the cash flow statement is showing isn't a cash inflow related to stock compensation.  Rather, it's a reversal of a non-cash expense that appeared on the income statement.

[KCLarkin]

12 hours ago, benchmark said:

How is SBC generally treated in the cash flow statement? 

 

https://finance.yahoo.com/quote/MDB/cash-flow?p=MDB

 

For example, this shows an operating cashflow of $53.7 million, but has a negative net income from operation of -$54.2 million. The only reason that the cash flow is positive is that they took about $103million of SBC and counted that as operating cash flow? 

 

I'm curious on if this is standard, and what other ways companies account for SBC? 

 

This is an accounting flaw. Basically, the company is using the barter system to game FCF. There really should be two transactions. A hit to the OCF to pay employees. And a financing inflow for the share issuance.

 

A good example of why the "cash is a fact, earnings are fiction" truthers are wrong.

[benchmark]

40 minutes ago, KCLarkin said:

 

This is an accounting flaw. Basically, the company is using the barter system to game FCF. There really should be two transactions. A hit to the OCF to pay employees. And a financing inflow for the share issuance.

 

A good example of why the "cash is a fact, earnings are fiction" truthers are wrong.

Just so that I understand, the $103 million SBC is basically them issuing shares to pay employees? As I understand it, assuming it's mostly RSUs, should it be that they issue some shares, and sell the shares to public to cover the tax withholdings for the employees. There is zero cash incoming from the operating perspective, how/why can they claim to be net cash flow positive? 

[Dinar]

6 minutes ago, benchmark said:

Just so that I understand, the $103 million SBC is basically them issuing shares to pay employees? As I understand it, assuming it's mostly RSUs, should it be that they issue some shares, and sell the shares to public to cover the tax withholdings for the employees. There is zero cash incoming from the operating perspective, how/why can they claim to be net cash flow positive? 

Step one - record an expense on your income statement for stock compensation, which reduces your net income.  Step 2, on the cash flow statement you add back all non-cash expenses - depreciation, amortization, and non-cash compensation.   There is no issuing RSUs or options to the public.  

[gfp]

This is standard accounting on the cash flow statement.  Use the SEC filing and not some yahoo site.

https://www.sec.gov/ix?doc=/Archives/edgar/data/1441816/000144181623000087/mdb-20230430.htm

Page 5 will show you statement of cash flows.

 

There is $53.7 million in cash from operations during the quarter.  This is not "owner earnings" for the reasons mentioned above.

[benchmark]

26 minutes ago, Dinar said:

Step one - record an expense on your income statement for stock compensation, which reduces your net income.  Step 2, on the cash flow statement you add back all non-cash expenses - depreciation, amortization, and non-cash compensation.   There is no issuing RSUs or options to the public.  

 

31 minutes ago, gfp said:

This is standard accounting on the cash flow statement.  Use the SEC filing and not some yahoo site.

https://www.sec.gov/ix?doc=/Archives/edgar/data/1441816/000144181623000087/mdb-20230430.htm

Page 5 will show you statement of cash flows.

 

There is $53.7 million in cash from operations during the quarter.  This is not "owner earnings" for the reasons mentioned above.

Thanks @Dinar @gfp

 

On page 21, they've accounted for SBC in cogs and expenses, and it showed that they have $54 million (loss). But since SBC are 'funny money', they've added it back to cashflow to demonstrate the 'true' earning power (cash flow). 

 

Do I get this right? even if this is standard, but it's somewhat deceiving. 

[gfp]

They add non-cash items back in the cash flow statement because those are the rules of that financial statement.  It is accounting for the cash.  It isn't 'true' earning power and I don't think they are claiming it is (or at least they shouldn't be).

[benchmark]

31 minutes ago, gfp said:

They add non-cash items back in the cash flow statement because those are the rules of that financial statement.  It is accounting for the cash.  It isn't 'true' earning power and I don't think they are claiming it is (or at least they shouldn't be).

Thanks @gfp

 

So how should one treat SBC from the 'owner's earning perspective? 

[gfp]

12 minutes ago, benchmark said:

Thanks @gfp

 

So how should one treat SBC from the 'owner's earning perspective? 

 

See KCLarkin's post above - just think about it as two separate transactions.  One where you get diluted by new share issuance (could be good, could be bad, depending on valuation at the time you are diluted) and one where you pay the employee with that money.

[John Hjorth]

All the helpful explanary posts to @benchmark to help to explain this are as such are totally correct as far as I can see. From an accounting perspective it roots a bit deeper, though, wich may perhaps provide some further conceptual clarity.

 

About 800 years ago, it was not the normal course of business to pay bills [costs] of a business with a share in the same business, and stock markets as such did not exist.

 

Wikipedia : Double entry bookkeeping.

 

The wonderfull thing here is that this system - now about 800 old - has proved to be timeless in this regard.

 

Principle of entry of a cash salary of USD 10,000 to a ledger :

 

Debit - Salaries [in the P/L] - USD 10,000

Credit - Cash [in the B/S] - USD 10,000

 

For a SBC it goes like this :

 

Debit - salaries [in the P/L] - USD 10,000

Credit - Equity [in the B/S] - USD 10,000,

 

Which also explains the cash flow statement adjustments needed in the cash flow statement mentioned above by @Spekulatius  and @gfp.

 

 

Edited June 6, 2023 by John Hjorth

[Dinar]

There is another problem - tax benefits associated with stock option issuance in the US.  Tax and GAAP treatment differs and vastly different figures are reported for GAAP and tax purposes.  So in a period of sharply rising stock prices, tax rates get reduced by tax benefits from options exercised.

[benchmark]

2 hours ago, gfp said:

 

See KCLarkin's post above - just think about it as two separate transactions.  One where you get diluted by new share issuance (could be good, could be bad, depending on valuation at the time you are diluted) and one where you pay the employee with that money.

This makes sense. 

 

From the owner's earning perspective, isn't SBC always bad? i.e., you now have more dilution. In this case, they have close to 4% dilution from a year ago.

[Dinar]

1 hour ago, benchmark said:

This makes sense. 

 

From the owner's earning perspective, isn't SBC always bad? i.e., you now have more dilution. In this case, they have close to 4% dilution from a year ago.

It depends.  The theory behind stock options and stock grants is that it aligns managerial interests with those of shareholders.  If done properly (like at Watsco) then I think it is a very useful tool.

[valueseek]

7 hours ago, KCLarkin said:

 

This is an accounting flaw. Basically, the company is using the barter system to game FCF. There really should be two transactions. A hit to the OCF to pay employees. And a financing inflow for the share issuance.

 

A good example of why the "cash is a fact, earnings are fiction" truthers are wrong.

This is how i hsve thought sbout it as well. It should be reduced from ocf for employee cost. And characterised in financing cf as it is more of a financing transaction. 

[gfp]

3 hours ago, benchmark said:

This makes sense. 

 

From the owner's earning perspective, isn't SBC always bad? i.e., you now have more dilution. In this case, they have close to 4% dilution from a year ago.

SBC isn’t always “bad” because anytime the shares are more dear than cash it might be preferable. You don’t know the future so it’s a guess but sometimes issuing highly valued shares is better than paying cash.