I have a comment and a question for all of you.

Comment, I think the credit to APIC on a non-qualified employee stock option plan is crazy.  I understand the logic that the reason why we are crediting APIC is because our GAAP compensation expense is less than the tax deduction, so to credit ITexpense on the tax entry ends up further boosting NI (and of course that doesn’t “feel” right).

The logic that is often given for this credit to apic is that standard setters don’t want market price changes to be reflected in equity.   Okay, but don’t we park market price changes in equity now when we do, for example, cash flow hedges and continuing adjust AOCI for those changes in FV?  This seems pick and choose-y to me.  Of course comments welcome on my perspective here.

The question that I found myself stuck on the other day when teaching this material is the following:   Regarding the SCF, I understand that we show the excess tax benefits (the APIC amount) in financing.  We also have to show it coming out of operating.   I BELIEVE that causes us to have to gross up income tax payable (not sure, this is what I surmise) to make that CFO balance.   So does that then mean we show total income tax expense as the grossed-up amount of Payable for the current portion and the regular deferred amount for the deferred.  Have no idea what I am saying (me either, but that doesn’t stop me).

Simple example.  Regular income entry is:  Dr. Income Tax Expense 300,000 and Cr. IT Payable 300,000

Tax entry for options is Dr. Income Tax payable 60,000   Cr. DTA 54,000 Cr. APIC 6000

So on indirect SCF, add back  246,000 and add back 54,000  and take out (6000) of excess benefits for CFO of 994,000.   Then financing has 6,000 “inflow.”

How much of IT expense of $300,000 is current and how much is deferred?  Technically current is 240,000 and deferred is 54,000  .. but that doesn’t add up.  ??  Anybody know?