March 12, 2003 12:47 PM PST

Stock option rules come under scrutiny

A U.S. accounting standards body agreed Wednesday to study whether to make changes to the rules that govern the way American companies treat employee stock options.

The Financial Accounting Standards Board (FASB) in Norwalk, Conn., added stock options accounting to its agenda, a step FASB requires for resolving an issue. FASB also agreed to cooperate with its European counterpart, the International Accounting Standards Board (IASB) in London, which has already proposed requiring companies to account for options as an expense.

"In the wake of the market meltdown and corporate reporting scandals, the FASB has received numerous requests from individual and institutional investors, financial analysts and many others urging the Board to mandate the expensing of the compensation cost relating to employee stock options," FASB Chairman Robert Herz said in a statement.

FASB plans to deliberate the issue in a series of public meetings and to send out a draft resolution for public comment by the end of the year, said Sheryl Thompson, a FASB spokeswoman. The group expects to issue a final standard as part of the Generally Accepted Accounting Principles (GAAP) next year, she said.

The debate over employee stock options, a form of compensation particularly popular among technology companies, has become a divisive one in the wake of major corporate financial scandals, such as Enron and WorldCom. The issue has divided lawmakers, business executives and investors.

The main question is whether U.S. accounting rules should mandate that companies treat the value of stock options granted to employees as a business expense. As it stands, companies have the option of either treating options as an expense or just disclosing them in footnotes to their annual report.

Few companies have chosen the expensing route because of the negative effect it could have on their profits. But a few, bending to investor pressure, have recently decided to expense their options programs. They include Coca-Cola, Amazon.com, and Computer Associates.

The FASB's decision to weigh the issue follows the group's request for public comment on the IASB's mandatory expensing proposal last November. The U.S. group also considered the issue in the mid-1990s, when it decided not to make any changes amid pressure from Silicon Valley companies and politicians.

The International Employee Stock Options Coalition, a group representing companies that oppose mandatory expensing, said FASB's decision to open up the subject for further inquiry was not surprising. It issued a statement highlighting a key issue in the debate, which is uncertainty about how to calculate the value of stock options.

"It remains very clear that there is no accurate and reliable method to value employee stock options and that relying on existing methods will mislead investors," the coalition said in a statement. "The Board's discussion today shed no additional light on how the all-important valuation issue could be resolved."

 

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