Following a telephone conversation with a financial journalist who was scheduling an interview with the CFO of a public company, we sent this e-mail to the journalist:

"Attached is my version of your interview with the CFO":

Journalist: "I notice you made $0.61 in fiscal 2005, but a footnote says you made only $0.53. Which number is the best reflection of your earnings power?"

CFO: "The $0.61, of course."

Journalist: "So, the $58.7 million is just a bogus expense, or let's take it for the past three years, $141 million. I should just ignore that? Just FASB’s foibles?"

CFO: "Absolutely!"

Journalist: "I noticed you took a stock-based compensation expense of $600 million on your tax return the past three years. Are you scamming the IRS? I got that number by dividing the tax benefit by 0.35, the statutory tax rate."

CFO: "Oh no, you see, the tax law gets quite complicated, but it all boils down to the fact that our employees are taxed on the discount at which we issue stock to them, and so the IRS gives us a tax deduction for the same amount on which they tax our employees. It is all legitimate."

Journalist: "OK, I get that. Stock-based compensation is an expense at the IRS, but not when you cross the street and enter your corporate office. It's like having your cake and eat it. They tell me stock-based compensation is a business expense in Canada. Good thing you did not incorporate in Canada."

CFO: "Well, I don't know how they account for the stuff in Canada. We follow US GAAP."

Journalist: "Just so. Strange how economic events can be accounted for differently depending on which side of the border you stand, not to mention what happens when you walk into the offices of the IRS. It is like arguing that if you live in Armenia the earth is flat, but move to Belgium and the earth suddenly changes its shape. You want the capital markets to believe all this baloney?"

CFO: "Well, if you put it like that, but in reality it all according to GAAP and perfectly legitimate. We don’t make the rules."

Journalist: "I noticed you spent $1.4 billion the past three years buying back stock. Yet, the basic share count has increased from 781.5 million to 789.6 million. I guess the rate at which you issue stock and options to employees exceeds the rate at which you buy back. Would it be faulty to argue that one should adjust free cash flow (and earnings for that matter) by the cash you spent on mopping up the dilution caused by your stock option program?"

CFO: "Well, it is not as simple as that. You are confusing the issue and not comparing apples with apples. Buying back stock is a capital allocation decision. It is a financing activity. It has nothing to do with stock options, which is a form of cashless compensation."

Journalist: "I guess if you believe that, you are living in "Armenia." How does it benefit me as a shareholder if you first inflate the share count, by issuing stock to employees in lieu of cash wages and then you spend real cash to buy back the stock? I'm not looking it from a faulty accounting construct. I'm looking it from a clear economic perspective."

CFO: "Please yourself."

Journalist: "If I adjust free cash flow the past three years by what you spent on buying back the exact number of shares you issued to employees, net of employee contributions, Starbuck earned free cash flow of $364 million the past three years, or $120 million p.a. The free cash flow yield is approximately 0.5% ($120M/$24B). I think investors are drinking FASB's Kool-aid."

CFO: "Investors are recognizing our superior growth and all the other outstanding qualities of the company and its business model."

Journalist: "The proxy shows me that the CEO's unexercised options are worth $310 million, on top of another $40 million that he "realized" in 2005. One could argue that the stock option program has the potential of placing more cash in his pockets than the company earned in free cash flow (properly calculated), the past three years."

CFO: "The company has a market capitalization of $24 billion. His compensation is a function of the wealth he has created for all shareholders."

Journalist: "OK, grant you that, but assume investors ditch the Kool-aid and smell the coffee so to speak and the market value of your company shrinks to $12 billion, more like $5 billion - but let's be generous, all this compensation is not going to sit well with investors."

CFO: "Wild speculations. Let's get back to facts."

Journalist: "Oh facts. I love facts. Tell me, is your tax expense for 2005 of $302 million, fact or fiction?"

CFO: "I told you we follow GAAP?"

Journalist: "I put it to you that your tax expense is part reality and part fiction. The $302 million includes a bogus debit of $110 million - a kin to a deferred tax adjustment for a permanent difference - that serves no other purpose than to disguise the fact that your taxable income is much lower than book income. For tax purposes, you deducted $314 million in stock-based compensation and there is no such deduction on your income statement. Without that bogus debit, you would have reported effective tax rates of 30.2%, 27.1%, and 24.1% the past three years. Instead, you are now reporting 38.6%, 37.3%, and 37.9%. The bogus journal entry is a debit to the income statement (in other words to shareholders equity) and the credit goes to shareholders equity as well. It is pure window dressing that adjusts for a permanent difference, to deceive lawmakers in believing that stock-option laden companies pay their fair share of taxes."

CFO: "You're off the charts."

Journalist: "If it were not for this bogus journal entry, companies like Cisco, Ebay and Yahoo would have reported tax credits during the heyday of the Internet, despite showing pre-tax income that ran into billions of dollars. It is tough lobbying lawmakers to intervene and stop FASB from forcing you to expense stock options when your income statement shows a tax credit. The credit comes from the fact that the stock-based compensation expense on the tax return exceeded the taxable income earned by these companies. The bogus journal hides this unpalatable fact. I think I'll stick to the adjusted free cash flow number I highlighted earlier - unfettered free cash flow. The rest is accrual accounting gone mad - talking about being off the charts."

CFO: "I have to go. You obviously have a hidden agenda."

Journalist: "Well, let's not talk about who hides what from whom."