FASB Revisits Stock Options Expense Requirement
Proposal Sparks Comments, Pro and Con

By Simon Eskow

NEW YORK—A Financial Accounting Standards Board proposal that would force companies to expense stock options has ignited strong opinion, pro and con, in letters to FASB, newspaper editorials and testimony on Capitol Hill.

A torrent of comment letters from more than 2,000 people swamped the FASB website in the first six weeks after the board released its exposure draft at the end of March. Supporters called the proposal a long-overdue piece of the transparency puzzle, while opponents argued that stock volatility precludes any reasonable way to account for the value of options.

The battle over options also emerged in Washington, D.C., where Rep. Richard Baker (R.-La.) has proposed a bill to severely limit expensing the stock options, while FASB officials testify to the proposal’s necessity before Congressional committees.

So many familiar faces butting heads over this particular accounting issue has a tinge of déjà vu all over again. But, despite some atavistic protest over FASB’s authority, the current atmosphere is notably different from that of 1995, when FASB backed off a similar proposal under intense pressure from Congress, which threatened essentially to legislate the regulator out of existence.

“Last time, everyone was opposed to FASB,” former board Chairman Dennis Beresford said. “This time it is almost an even match: there are corporations and firms on either side of the issue, so it’s more of a normal debate. Sarbanes-Oxley creates a different kind of atmosphere.”

That Was Then, This Is Now

The board’s work on the new proposal began in November 2002. But the March 31 release of its exposure draft, “Share-Based Payment—An Amendment of FASB Statements No. 123 and 95,” created a focal point for latent contention.

Company workers primarily in the technology sector wrote to FASB that its proposal would be the death knell of broad-based stock options. About 1,500 people identified as employees of computer-equipment maker Cisco Systems, Inc., registered their opposition on the board’s website. Many stated a concern that FASB’s rule would stymie innovation and creativity because without options employees would lose a direct stake in their company.

Others have taken a more global perspective about the rule, claiming that the expensing of stock options would harm the economy. In a story about Baker’s proposed Stock Options Accounting Reform Act (HR 3574), Reuters reported that while Rep. Michael Oxley (R.-Ohio) didn’t outright support the act’s end run around FASB, his evaluation of the board remained unflattering.

“You’ve got an unelected body called FASB that nobody has ever heard of that could very well make decisions that have an enormous impact on our overall economic picture,” Oxley told Reuters.

Baker himself made a similar statement after the March 31 release.

“There is mounting evidence of the terrible impact this rule would have on our economy at the very time we are fighting through a jobless recovery,” Baker said.

Baker’s bill would limit the expensing of stock options in financial statements to the five highest-compensated employees of a company. It would also require an impact study before it would allow the Securities and Exchange Commission to employ FASB’s rule at all. Baker’s bill had 107 cosigners as of the writing of this article and was set for a full vote in the House Committee on Financial Services.

Beresford, the former FASB chairman who now teaches at the University of Georgia, said he thought the bill was a “long shot” and unlikely to gain much support, noting that a similar bill hasn’t gained any momentum in the Senate Banking Committee, chaired by Sen. Richard Shelby (R.-Ala.).

“Senator Shelby has been key to the debate this time because...he’s refused to have hearings on it,” Beresford said.

In a May 6 commentary in The Wall Street Journal, Shelby decried the moves in Congress against FASB as an assault on the board’s independence.

“The success of FASB depends on its ability to remain insulated from the political process,” Shelby wrote. “If attempts are made to negate the long-term benefit of its rules by focusing on short-term considerations, then investors and our markets will suffer.”

The lack of support speaks to the big difference between 1995 and today. Beresford said that Baker’s legislation is much narrower than what Congress wanted to do almost 10 years ago.

“The last time would have put FASB out of business; this time the bill only addresses the accounting for stock options,” he said. “The potential for success was very high (in 1995) if FASB hadn’t compromised.”

Despite the vocal support of legislators from both parties, especially in California where many high-tech companies headquarter, there isn’t the same kind of interest as there was in 1995 in preventing stock options from being expensed.

In fact, at least anecdotally speaking, FASB has some backing from the business community. During a panel discussion at Baruch College’s annual Financial Reporting Conference, Time Warner Senior Vice President and Controller James Barge took a stand for FASB.

“Even if they’re taking away my stock options, I still don’t want Congress setting standards,” Barge said. The room filled with applause.

It is more likely than not that the FASB will get its proposal through.

Beresford said he believes the FASB will go through with the standard, deliberate on the comments that it receives and issue a final standard by the end of 2004.

The board is taking comments until the end of June. To read the exposure draft and view comments, go to www.fasb.org.