Three technological giants have joined forces in an attempt to prevent legislation that will require companies to report distributed employee stock options as current expenses. Cisco Systems Inc., Genentech Inc., and Qualcomm Inc. will present their proposal today before the Financial Accounting Standards Board, according to a report in The Wall Street Journal.
FASB has been wrestling with this issue for a decade in an attempt to release a standard that would require expensing of stock options. Barring a change in plans, the standard is expected to be released in final form by December 2004 and could become effective as early as January 2005. At the least, the triumvirate hopes to succeed in delaying the release of the FASB standard.
Due to the historical volatility of their stock, tech companies are among those who will be hardest hit if the FASB standard is enacted. The stock value in those companies has a tendency to fluctuate widely and can thus materially alter the value of stock options between the time the options are issued and the time they are ultimately exercised.
The Washington Post is reporting that the tri-company proposal includes a recommendation that supports expensing of stock options, but at a value based on a formula that encompasses average Standard & Poor's 500 Index values over an extended period of time. The group is also proposing a provision that would allow companies to assign a discounted value to stock options based on the fact that option recipients face restrictions on selling the options to others and on when they can buy and sell options.
The tech company plan would result in a reduction of stock option expenses of as much as 70% in comparison to the effects of the FASB standard.
There is a possibility that Congress might intervene – the House of Representatives has already passed a measure that would require companies to report only options given to the five highest-paid executives. The Senate, however, has not demonstrated support for this legislation.
Securities and Exchange Commission Chief Accountant Donald T. Nicolaisen has indicated he supports a delay in finalizing the FASB's option expensing standard. In a recent roundtable discussion about the proposed standard, he stated, "Concerns also have been raised about the effective date of the proposed standard. I am sensitive to this given the potential need for further implementation guidance."