Various newsletter have suggested that Company's that match employee contributions with stock will have no income statement impact, they will only have a dilution impact. Is there any truth to this? My understanding is that there will be expense.

It certainly has an impact on the statement but may or may not have an impact on net income. First off, stock contributions represent an expense to the employer. If it's not an expense how can you get the nice tax deduction?

Look at it another way, if the company were to contribute cash to the Plan and buy stock, they'd certainly record the cash contribution as an expense.

Are they contributing treasury stock or buying on the open market? That determines dilution versus a reduction in net income.

An item is not required to be an "expense" for book purposes in order for it to be deductible. This is the origin of the famous "book-tax" difference that drives many tax planning schemes. In fact, taxpayers are required to list certain book-tax differences on Schedule M to the Form 1120 so that the IRS can see what they are. Pension expense is one of the largest book-tax differences since companies will have a FAS 87 expense (income) each year but no tax deduction unless the company actually contributes cash to its plan.

I don't know the answer to the question whether a contribution of stock to a plan is treated as an expense on the income statement. I would have thought the answer was yes, but I've given up trying to figure out the arcane accounting rules.

If your question is purely from an economic perspective, than the answer is that there is no "cost" to the company. You just gave away income.

As for book reporting, the match expense would certainly be reported as "match expense" for the year, thus reducing net income. On the statement of stockholder's equity, there would be a corresponding increase to equity for the additional stock issued, such that the net impact on the company's equity is zero (i.e., the value of the company is unchanged). The newsletter may be referring to "comprehensive income" which simply means net income adjusted for junk that gets plugged through equity. Comprehensive income per share would be diluted because of the increase in the denomitor (i.e., the number of shares).

You're getting into some pretty advanced accounting here, so be forewarned. I am a CPA and did financial reporting for 7 years.

austin3515:

Could you please explain what you meant by your statement:



The reason why I ask that is because I've never had a client declare a dividend, so I'm not following you as to why the issuance of the shares represents giving away income in those circumstances.

Unlike you, I don't have an accounting background, so my question may be embarrassingly simple to accounting mavens.