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Phantom incomePhantom incomePosted Jan 22, 2004 9:49 UTC (Thu) by NAR (subscriber, #1313)Parent article: Report from the SCO front For each $1 drop in the company's stock price, SCO must record approximately $1 million in income. I'm pretty naive about these kind of business things, but I just can't undestand how can a company record income into its financial books when in fact the income doesn't exist. It's called fraud, isn't it?
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Phantom income Posted Jan 22, 2004 16:44 UTC (Thu) by blaisepascal (guest, #9336) [Link] The accounting is, in the best light, dodgy but legitimate.newSCO wanted cash to pursue litigation, but didn't have a product that was selling nor did it want to issue bonds or go to the bank for a normal loan. Incurring more liability would have looked bad. So it arranged, with Baystar, a deal that would act like a loan, but wouldn't look like one on the books. Baystar bought $50Mil of a special issue stock which had, as a string attached, an option to sell some of the stock back to newSCO at market prices under certain trigger conditions. newSCO booked this as income (from selling the stock) and as an expense (for the strike-price of the options), which works out to a wash as far as profit goes. When the price of the stock goes up by $1/share, the value of the options increases, and so does the expense associated with them, so they record an expense associated with that. When the price of the stock goes down by $1/share, the value of the options decreases, and so does the expesne associated with that. So when the share price goes up, the reportable profits go down, and vice versa. Clear as mud now?
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