Expensing Opponents Mount Last Stand To Block FASB

True to their word, opponents of the controversial new accounting rule requiring public companies to report stock options as an expense are mounting their final stand in Congress.

Two California members of Congress have introduced a measure that would order the Securities and Exchange Commission to trump the rule adopted by the Financial Accounting Standards Board. The resolution, under review by the Financial Services Committee of the House of Representatives, would simply require enhanced disclosures of stock options, and would mandate an impact study over a three-year period.

FASB finalized its rule in December, but delayed its effective date until mid-2005 amid pressure to ease the compliance burden for companies already stretched beyond capacity by Sarbanes-Oxley demands. Supporters of the new rule criticized the delay, concerned it would create a window of opportunity for Congressional action to stop the rule from ever taking effect. The House approved a similar bill last year by a margin of 312-111 to try to stop FASB’s rule, but it died in the Senate.

Stock options became an important part of many companies’ compensation programs, especially when stock values soared in the late 1990s. The debate over stock options focuses on their impact on the financial condition of a company: Supporters of expensing say stock options are a form of compensation and their value should be deducted from earnings; opponents say options do not reduce the net asset value of the granting company, and so should not reflect a reduction in earnings. As FASB deliberated the rule and its intention seemed more certain, scores of public companies began announcing their plans to either voluntarily expense options or scale back their offerings.

Last Year’s Model

When FASB finalized the rule in December, opponents promised to continue the fight. A coalition of business organizations and corporations, many of them in the high-tech sector where stock options have played a critical role in executive compensation, promised to lobby Congress for new legislation.

The new bill is like the one that failed last year. It would require the SEC to enhance minimum disclosures on stock options with the goal of better explaining the impact of the stock option plan on a company’s financial status. It also would require a summary of the stock options granted to the five most highly compensated officers. As for the study, the bill would require the SEC to track the effectiveness of such disclosures over three years and would require the Secretary of Commerce to issue a report on the overall impact of stock options on employee ownership, recruitment and retention, research, economic growth and competitiveness.

Dreier

“FASB issued a stock option expensing standard that will render a huge blow to the 21st century economy,” said bill co-sponsor Rep. David Dreier, a California Republican. “Giving investors the ability to understand how stock options impact the value of their shares is critical. And equally important is preserving the ability of companies to use this innovative tool to attract talented employees.”

Eshoo

In introducing the new Congressional action, Rep. Anna Eshoo, a California Democrat, said “FASB’s mandatory expensing rule would have a terrible impact on companies that rely on options to recruit and retain the most talented employees. Without stock options many of these companies, including some of the most successful high-tech and biotech firms, would not even exist today.”

FASB and supporters of the new rule point out that the concept was under study and deliberation for several years even before it became a formal project for the standard setters in early 2003. FASB has served since 1973 as the governing body to set financial reporting standards under the SEC. The American Institute of Certified Public Accountants also recognizes FASB standards as authoritative for the private sector.

Crooch

With a new measure now beginning its path through Congress, the SEC declined comment but FASB expressed its displeasure. “I personally continue to be disappointed that Congress continues to try to delay the FASB's standard on expensing share-based options. Stock options are compensation and should be expensed,” said FASB member Michael Crooch.

“Certain special interests continue to encourage Congress to become involved with accounting standards,” said FASB spokesman Steven Getz. “It is hoped that Congress will not interfere with [the new standard], as doing so could raise some legitimate questions about the integrity of the reporting system. For whom are financial reports prepared and for what purpose? Is it to properly inform investors and other users, or are they to enable companies to cast themselves in a favorable light?”

Turner

Political observer and former SEC Chief Accountant Lynn Turner said he doesn’t believe there will be enough support in Congress to fully pass the measure. “This legislation is directed at the SEC in an attempt by some members in Congress to get the SEC to water down the FASB’s rules,” Turner said. “I would hope the SEC would be very careful in wading into dangerous waters.”