The Financial Accounting Standards Board (FASB) is soon expected to require companies to expense stock options like other forms of compensation, but opponents are fiercely lobbying Congress to block the new rule.
The anticipation of FASB action, which could come this week, has "galvanized the effort" said Jeffrey Peck, a lobbyist and consultant to the International Employee Stock Options Coalition. "We are, it's fair to say, in constant blitz mode." Joining the effort are numerous high profile technology companies, the Nasdaq Stock Market and professional associations representing executives at the largest U.S. companies.
FASB, which sets rules for corporate accounting, is expected to set aside a comment period that may produce minor changes in the rule, which would require companies to record the cost of stock options as an expense on income statements. The rule is expected to take effect for fiscal years starting after Dec. 15.
The existing FASB rules allow companies to expense options, but it’s not required.
According to the Wall Street Journal, the expected FASB rule is already changing the way companies compensate employees. A recent survey suggests companies are shifting executive compensation packages away from plain stock options and toward restricted stock, long-term cash incentives or premium-priced options.
Stock options are especially popular in the tech sector, where employees are allowed to buy shares at a fixed price and later sell them at a profit if the company's stock rises.
Legislation being considered in the House and Senate would limit mandated expensing of stock options to those owned by the corporation’s top five executives. The legislation would also delay implementation of the new rule until an economic impact study is completed.
Some of the arguments against expensing of stock options that appeared in the Journal over the last week include the assertion that FASB has not come up with an accurate expensing method. Wrong numbers would muck up the income statements, opponents say, making financial reporting more confusing for the average investor.
Corporate governance advocates, however, object to the idea of counting options for only the top five executives. "If you wanted to rename this (legislation), it would be the 'Pander to tech companies that fill my campaign coffers"' bill, Patrick McGurn, a special counsel for Institutional Shareholder Services, told the Associated Press.
Accounting scandals of the last several years are likely to loom large in the minds of lawmakers, however. Some blame stock options for enticing executives at companies like Enron and WorldCom to manipulate earnings to inflate the stock price and then sell their lucrative personal holdings.
FASB Chairman Robert Herz has told lawmakers that if Congress moved against the board's action on options, it "would be in direct conflict with the expressed needs and demands of many investors."