FASB Proposes Expensing of Stock Options
March 31, 2004. The Financial Accounting Standards Board (FASB) released a document titled "Exposure Draft, Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." It proposes that companies must expense employee stock option plans.
The FASB summarized its report in a release. It wrote that "The exposure draft covers a wide range of equity-based compensation arrangements. Under the Board’s proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award would generally be measured at fair value at the grant date. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements."
The FASB's comment period for the exposure draft ends June 30, 2004.
Rep. Anna Eshoo (D-CA), who represents a Silicon Valley district, stated in a release that "This issue cuts to the heart of job creation, economic growth and competitiveness ... Broad-based stock option plans for rank-and-file employees are a critical tool in helping small start-ups to mature into medium and large-size companies. Yet if FASB's proposal is put into effect, it will result in the elimination of most broad-based stock option plans, doing away with a powerful tool for attracting talented workers and promoting employee ownership."
She added that "FASB's draft rule ignores the fact that no accurate model for valuing employee stock options has been identified -- including the binomial and Black-Scholes models required by FASB's proposal ... Neither of these methods was designed for the purpose of valuing employee stock options and FASB has refused to road-test these formulas in a real-world business environment."
Rep. Richard Baker (R-LA), Rep. Eshoo, Rep. David Dreier (R-CA), and others have introduced HR 3574, the "Stock Option Accounting Reform Act", a bill that would require expensing of stock options for only the CEO and the next four highest paid officers. The related bill in the Senate is S 1890, sponsored by Sen. Mike Enzi (R-WY).
The House Financial Services Committee's Subcommittee on Capital Markets, which is chaired by Rep. Baker, announced that it will hold a hearing on April 21, after the two week House spring recess, to evaluate the FASB's exposure draft on share-based payments, or stock options, and its effects on publicly traded companies.
Rep. Baker stated in a release that "With today's action I fear FASB is beginning to stand for Flatten All Start-up Businesses ... 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. It's my hope this hearing will set the stage for near-term congressional action on vital legislation that helps to protect workers and job-creating businesses."
The FASB report was widely criticized by technology industry groups. For example, Robert Holleyman, P/CEO of the Business Software Alliance (BSA), stated in a release that "Stock options are a key benefit that technology companies -- particularly start-ups -- use to attract and retain talented workers ... Forcing companies to list options as an expense, rather than the dilution of ownership that they are, would make them more expensive, and ultimately, less available to workers."
Ken Wasch, President of the Software & Information Industry Association (SIIA), stated in a release that "In a move touted as a step to improve financial transparency and enhance the ability of investors to evaluate corporate performance, FASB has actually accomplished the opposite. By requiring all companies to expense the value of employee stock options, absent a method to accurately value the options, corporate balance sheets will become less transparent, not more."
Wasch added that "Not only does the proposal fail to accomplish its objective of clarifying corporate accounting, but it poses an enormous threat to innovative companies and the U.S. economy at the worst possible time. The U.S. high-tech industry was built on entrepreneurship and innovation, inspired largely by stock options. Mandatory expensing of stock options will have a chilling effect on the on-going economic recovery, forcing companies to abandon their commitment to broad-based plans."
George Scalise, President of the
Securities Industry Association (SIA),
stated in a release that "Stock option grants to employees have been an
important part of the compensation program that helped drive U.S. high-tech
companies to world leadership ... Stock options have been a powerful incentive
for employees of U.S. chipmakers, aligning employee interests with those of
shareholders. More than 80 percent of the options granted by SIA members are to
employees who are not corporate officers. Current plans are very broadly based
and give a wide range of employees an opportunity to share in their companies’
success. The proposed FASB rule would likely significantly diminish the use of
broad based stock option and stock purchase plans and make it more difficult to
attract and retain talented employees."