In a letter this week to the Financial Accounting Standards Board (FASB), David M. Walker, Comptroller General of the United States gave full support to the proposed statement requiring companies to record share-based payment as an expense.
Mr. Walker said, âIn our view, stock options and other forms of share-based payment have economic value and represent a form of compensation expense. Therefore, we believe that the economic substance of such transactions should be reflected as compensation expense in the calculation of a company's net income to accurately portray its financial results. The current standard, which permits companies to choose between two methods, allows companies to select the impact on net income. It also creates a barrier to comparable financial information, both domestically and internationally, because the choice of methods used will result in differences in reported amounts across companies due to the different methods of accounting. We believe that a requirement to expense stock options and other share-based payment will provide additional transparency, clarity, and comparability in financial reporting.â
Mr. Walker continues, âwe believe it is critical that FASB complete its analysis of comments received on its exposure document on share-based payment and finalize its proposed Statement in accordance with its established independent standard-setting process. As a safeguard, the Congress has provided the SEC with oversight responsibility for FASB standard-setting activities. In enacting the Sarbanes-Oxley Act of 2002, the Congress recognized the importance of having an independent standard-setting process that facilitates accurate and effective financial reporting and protects investors. The Act specified criteria for the SEC to use for determining whether a private-sector accounting standard setter's principles will be considered as generally accepted. The SEC determined that FASB met the statutory criteria established in the Sarbanes-Oxley Act of 2002. In our opinion, the FASB's independent standard-setting process, subject to SEC oversight, should be allowed to proceed in its consideration of accounting for stock options.â
The letter goes on to state that the GAO supports the four principal reasons FASB cited for issuing the new proposal:
- Addressing concerns of users and others that the use of the intrinsic value method results in financial statements that do not faithfully represent economic transactions, which can distort the financial condition and operations of the issuer;
- Improving the comparability of reported financial information through the elimination of alternative accounting methods;
- Simplifying U.S. generally accepted accounting principles by requiring the use of a single method of accounting for share-based payment; and
- Enabling international convergence and greater international comparability in the accounting for share-based payment.