Stock Option Expensing Subject of House Hearing

Robert Herz, chairman of the Financial Accounting Standards Board (FASB) strongly objected this week to proposed legislation that would place a three-year moratorium on the expensing of stock options. He said the action "would be in direct conflict with the expressed needs and demands of investors."

"The moratorium would establish a potentially dangerous precedent," Herz said in testimony before a House panel. "It would send a clear and unmistakable signal that Congress is willing to intervene in the independent and open accounting standard-setting process based on factors other than the pursuit of sound and fair financial reporting."

Reps. David Dreier, R-Calif., and Anna Eshoo, D-Calif., introduced a bill in March that would prevent the Securities and Exchange Commission from recognizing any new accounting standards related to expensing of options for at least three years.

Herz said that FASB, the private-sector body that sets U.S. accounting standards, intends to set forth its own proposal to account for the controversial options by the fourth quarter of this year. Like all FASB actions, the plan would be subjected to a public comment period.

More than 10 years ago, FASB considered a similar plan to make companies expense stock options but was stymied by intense political pressure.

Those in favor of stock option expensing say that options were behind the stock market bubble and gave executives a way to finesse short-term earnings to boost stock prices so they could cash in on the options. Currently, companies don’t have to expense stock options and most don't reduce their earnings to reflect the value of options. However, they choose to receive a corporate tax deduction for options that are exercised. And, companies must disclose to investors in the footnotes of their financial statements what the result would be on the bottom line if they had booked options as an expense.

Already more than 280 companies expense options voluntarily — 94 of them are S&P 500 companies, according to Bear Stearns.

Opponents of the expensing proposal include technology companies and some politicians, who believe that options are an outstanding compensation option for start-up companies and help to fuel the economy.

"Unfortunately, FASB has indicated it will only focus on accounting standards and not economic factors when it rules whether to require stock option expensing," Eshoo told the House Capital Markets Subcommittee.

There is also a lack of agreement among experts about how to accurately value the options at the grant date since the value changes over time based on the company’s stock price, they assert.

"Without the ability to offer stock options, many industry leaders—including Intel—would never have gotten off the ground," said Craig Barrett, chief executive of Intel.

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