US Tech Firms Attempt To Sidestep New FASB Rules

by Leroy Baker, Tax-News.com, New York

09 May 2005

A number of US-based technology firms are reportedly using an accounting technique in order to mitigate the effects of new stock option expensing rules, according to regulatory filings.

The companies, which include the likes of Sun Microsystems, Advanced Micro Devices and Micron Technology, are seeking to bypass the new expensing requirement by accelerating the schedules by which some stock options "vest," or become eligible for employees to buy.

"The purpose of the acceleration is to enable the company to avoid recognizing compensation expense associated with these options in future periods in its consolidated statements of operations," when the new accounting rules go into effect, Sun said in its regulatory filing.

The filing went on to add: "The company also believes that because the options to be accelerated have exercise prices in excess of the current market value of the company's common stock, the options have limited economic value and are not fully achieving their original objective of incentive compensation and employee retention."

Under the system as it currently stands, listed firms need only disclose stock option costing in footnotes to their financial statements. However, the new rules proposed by the FASB will oblige them to deduct those expenses from earnings, a move likely to drastically lower profits in some cases.

The move is intended to prevent abuses of the stock option system such as those which occurred at Enron and WorldCom. However, critics of the planned changes have suggested that they are likely to lead to the inclusion of flawed information in the financial statements of public companies, as methods of valuing stock options will necessitate the use of estimates of the firms' future performances.

Last month, the Securities and Exchange Commission voted to approve a measure making the rule effective for fiscal years, not quarters, beginning after June 15. This effectively gave most US firms an additional six months to comply.

"Implementing the new standard at the beginning of a fiscal year allows companies to change their accounting systems in a more orderly fashion," stated the SEC's chief accountant, Donald Nicolaisen, following the vote.

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