FASB Stock Option Proposals Face Resistance

by Glen Shapiro, LawAndTax-News.com, New York

17 March 2003

Norfolk, Virginia-based Financial Accounting Standards Board, the group that sets US accounting standards, has begun a re-examination of its audit rules on employee stock options, but finds itself at odds with the Software and Information Industry Association (the principal trade association for the software and digital content industry).

The FASB had indicated that its proposals, which it hopes will be in place by March 2004, "would converge" with those of the London based International Accounting Standards Board. The IASB has already proposed requiring companies to expense stock options to be mandatory practice.

SIIA President, Ken Wasch believes the FASB's decision (requiring companies to expense stock options rather than simply recording them as an accounting 'cost estimate' footnote - which most Silicon Valley businesses prefer) doesn't answer the key questions surrounding the debate over the treatment of stock options. In particular, it neither solves nor proposes to solve the critical question of how to value employee stock options.

In line with the tech-industry lobby group, International Employee Stock Options Coalition's stance, the SIIA President stated, "While FASB has now formally committed to moving towards requiring companies to expense stock options, recent news has led the debate in the exact opposite direction. FASB's decision runs counter to an announcement by Coca-Cola this month that its recently adopted valuation method is inadequate. It also runs counter to recent remarks by Paul Volcker, chairman of the foundation that oversees the IASB, that 'there is so much controversy about how to expense [employee stock options], it may conceivably even now kill the credibility of expensing them.'

Senators, including the Senate's only accountant, Republican Mike Enzi of Wyoming, and 14 others including Democrats Edward Kennedy of Massachusetts and Joseph Lieberman of Connecticut, wrote to FASB opposing the mandatory expensing of stock options. They argued it would inflict a "fatal blow" on broad-based option plans.

Wasch added, "Indeed, mandatory expensing -- using the flawed valuation models available today -- will lead to inaccurate and misleading information for investors. This is not the best interest of the markets or shareholders. The plain fact is that employee stock option grants simply cannot be valued accurately. Until FASB can provide a solution to accurately value employee stock options, we think there is still very much work to be done.

"Perhaps the most troubling aspect of FASB's decision was the disregard for the social consequences. It is as if FASB has every intention of ending broad-based stock options plans, at the expense of employees who benefit from them and companies that rely on them. This, I find, very troubling."

Bob Herz, FASB's Chairman confirmed his intention to get options expensed in Congressional testimony on March 4th, and the FASB believes it has strong support from the Wall Street investment community. In response to FASB's request for feedback on stock option rules, 76 percent of responding investors wrote in favour of expensing options, while 88 percent of the responses from corporate America voiced opposition to the move.

Some commentators believe that Congress is unlikely to interfere with the FASB's preferred route. When FASB last took up the issue of stock options in 1994, Silicon Valley's political muscle successfully rejected its proposal then to require the full expensing of options. But having waited until the tide of hi-tech companies' corporate accounting scandals had reached crisis point last autumn, the FASB may have a better chance this time around.

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