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accounting question about stock options

I have a nagging question about expensing stock options and I'd appreciate your help.

I'm reading cash flow entry 'excess tax benefit related to share-based compensation' in companies' SEC filings and I don't understand why in addition to adjusting Additional Paid-in Capital (APIC) upwards for tax benefit, there is no adjustment to retained earnings downward.

If company overpaid taxes originally, then by the same logic it underpaid in compensation. And thus, retained earnings figure is inflated.

They way I see it, employee contributed labor and was paid in stock. Therefore, the asset side didn't change, but liability was reduced and APIC increased by the same amount.

But in practice, it's more complicated. Retained earnings are inflated (due to original under expensing stock options) and APIC only represents tax benefit portion. The numbers come out correctly but it distorts the picture of true retained earnings.

I'd love your comment.


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