The Securities and Exchange Commission fanned the flames of controversy last week when it altered the effective date of stock option expensing to give the vast majority of public companies another six months to comply.
Reactions ranged from shock and anger on the part of the investor community to relief and rejoicing on the part of expensing critics, who have hinted they’ll take the six-month extension to continue pitching Congress for legislative intervention to overturn the rule.
In a seemingly unprecedented maneuver, the SEC issued a statement last week saying it had adopted a new rule to amend the compliance date for the highly contentious share-based payment standard finalized by the Financial Accounting Standards Board. The standard as adopted late last year requires public companies to show share-based payments such as stock options as an expense rather than a footnote on financial statements.
FASB originally set its effective date for the start of 2005, but under intense pressure delayed implementation until after June 15, 2005, for most companies and after Dec. 15, 2005, for smaller companies. Observers say the SEC has continued to press FASB for yet another delay, but FASB refused. The SEC’s tinkering with the effective date marks the first time observers can remember that the Commission has stepped in and altered a rule as issued by standard setters since the 1970s, when there was a flap over oil and gas accounting rules.
Too Many Changes Mid-Way Through Fiscal Year?
Specifically, the SEC modified FASB’s effective date by allowing companies to postpone implementation until the beginning of their fiscal year following June 15, 2005, which for most companies means the start of calendar year 2006. As issued by FASB, the rule would have taken effect for companies in the first reporting period, meaning their first quarter, following June 15. That would have seen most companies adopting the rule mid-fiscal year.
Trott
Despite the SEC’s rare decision to trump FASB, board member Edward Trott was reserved in his reaction. “The SEC’s action to postpone the effective date is a disappointment to me, but I don’t think it calls into question the need for the standard to improve financial reporting, nor does it call into the question the guidance the board has given in the standard,” he said.
Trott pointed out, however, that the board routinely weighs concerns about reporting and implementation against the benefits to the user community when setting effective dates for new rules. “We did that late last year” when finalizing the standard, he said. “And I believe our decision adequately met that concern.”
Donald Nicolaisen, the SEC’s chief accountant, said the Commission was hearing concerns about difficulty in comparing quarterly reports, as well as difficulty in changing accounting systems—not to mention audit and review procedures—mid-way through a fiscal year. The Commission also was sensitive to concerns about accounting staffs stretched thin by other compliance issues, like reporting on internal controls as per Sarbanes-Oxley.
Full Of Water
Analysts see big holes in the SEC’s reasoning. “FASB originally was making [the rule] effective at the beginning of 2005 and changed it to mid-year only after heavy duty arm twisting by the SEC,” said Lynn Turner, managing director of research at Glass Lewis & Co. and a former chief accountant for the SEC.
He also points out that the SEC change in effective date gives the majority of companies an additional six months, but not all. “Why does a Dec. 31 year-end company need more time to get ready than a June 30 year-end company?”
Jack Ciesielski, owner of investment research and portfolio management firm R.G. Associates and publisher of an accounting advisory service for security analysts, says SEC’s reasoning is “full of water” when it comes to concern about staff overextension on other compliance issues. “Companies have been reporting [stock options] for years in their footnotes,” he said. Recent SEC guidance “gave them every implementation break they could want, save delay, and hundreds of companies have already found ways to comply.”
Ciesielski said the extension will lead to more companies accelerating vesting to get options off the books before they become an expense against earnings.
Continued Erosion
Roper
Reacting to early reports last week that SEC’s announcement was pending, Barbara Roper, director of investor protection for the Consumer Federation of America, said “It’s an extraordinarily bad idea. If they delay it another six months, there’s a very real possibility it will never take effect at all.”
Roper is concerned the well-heeled tech company movement to overturn stock option expensing will ratchet up lobbying efforts. The House of Representatives passed a measure last year that would have altered and watered down the FASB expensing rule, but the bill died in the Senate. A similar bill is now under review in the House Financial Services Committee. “If you give them enough time, they’ll get legislation through Congress,” Roper said.
Elizabeth Fender, a spokeswoman for the Financial Accounting Coalition for Truthful Statements, shares Roper’s concern. “I’m quite concerned that additional time will allow for more lobbying to further erode or stop the new rule altogether,” she said. “This delay move by the SEC certainly did not have investor interests in mind.”
Representatives of the lobbying movement could not be reached for comment last week, but a spokesman for the International Employee Stock Options Coalition indicated the efforts will continue. The group’s Web log carried a statement praising the SEC announcement. “We strongly believe that our nation’s rules and regulations must not discourage the participation of all of a company’s employees in a broad-based stock option plan,” the statement said.
Schacht
Offering a more tempered reaction to the news, Kurt Schacht, executive director of the CFA Institute Centre for Financial Market Integrity, said SEC’s action is “not an unreasonable extension. I know it’s a disappointment to those who are waiting for expensing, but there are transition issues involved.”
The final version of the SEC amendment that alters the compliance date of FASB Standard No. 123, Share-Based Payment, is available from the box above, right, as are related documents, guidance and Compliance Week coverage.
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