PayPal, a company that specializes in online money transactions for the purchase of different goods, ranging from games to clothing articles, always looks good for potential investors and has a history of exceeding the expectations of Wall Street when it comes to pays per share and overall revenues. However, there is a reason why the company’s performance per quarter remains so impressive: when PayPal calculates its favored earnings measure: it does not consider the stock-based compensation to its employees as a cost (Morgenson). This means that favored earnings in PayPal are inherently higher than those of other companies.
It is considered an unspoken rule in the business community to calculate the stock-based compensation as a cost when doing business, as it allows the revenues to be more accurate in the eyes of potential investors (Morgenson).
However, it is not a rule that can be legally enforced. Some companies, like PayPal, use it to obscure the realities of their earnings from potential investors, who assume that the company calculates their favored earnings in the same way that others do. This allows PayPal to attract more investors, and with more investors, to increase its payments per share and satisfy everyone, thus creating an instance of a self-fulfilling prophecy.
This issue is interesting from both accounting and commercial standpoint, as it shows how accounting manipulations can directly influence the flow of potential investors and improve the company’s overall public standing (Morgenson). To summarize, PayPal directly took a cost out of its income statement and placed it on a different line, effectively backing it out of the results. This maneuver, though considered shady by modern accounting practices, is helping them meet and exceed earnings expectations immensely.
Work Cited
Morgenson, Gretchen. “The Accounting Tack That Makes PayPal’s Numbers Look So Good.” The New York Times. 2017. Web.