Cisco's Plan Rejected but SEC Leaves Door Open to New Approaches

Donald Nicolaisen, the departing chief accountant of the U.S. Securities and Exchange Commission (SEC), said on Friday that based on the SEC’s staff review of Cisco Systems’ plan to value stock options by selling similar securities to investors, he had “significant doubts” that the method would produce an estimate of fair value, Reuters reports. In a separate statement, however, SEC Chairman Christopher Cox said that the staff’s conclusions were “tentative and subject to ongoing assessment,” according to the New York Times. For now, Cox said, “It is not our intention to narrow the field and to limit experimentation, but rather to welcome it.”


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Cisco’s Chief Financial Officer, Dennis Powell said, according to the NY Times, “We are pleased that the SEC is encouraging continued dialogue around potential ways of using a market instrument to value stock options. It is clear that a market-based approach would determine a real value as opposed to models that estimate theoretical value.”

The Financial Accounting Board’s Statement 123R, Share-Based Payment, issued in April 2005, requires companies to expense stock options for fiscal years beginning after June 15. Cisco’s year end is July 31. Companies with a calendar year end will have to expense stock options beginning in January 2006. Currently, companies are required only to footnote the expense in financial statements, the Los Angeles Times reports.

Western Sierra Bancorp is accelerating vesting all outstanding stock options to the third quarter of 2005. One-quarter of the bank’s options are currently unvested, said a report in the Sacramento Business Journal. Western Sierra will account for them with a footnote in the financial statements for this year, and will account for future options when they are granted, as employee expenses. The Business Journal reported that more than 100 publicly traded companies have taken this route so far this year.

The hi-tech industry led all in granting stock options to executives and employees, and companies like Cisco are likely to see the greatest impact on their earnings for the first quarter of 2006, according to the Los Angeles Times. Microsoft already expenses stock options along with other large non-technology public companies, the Washington Post reports.

Stock options continue to be favored in executive compensation packages, Loose Change reports. A survey of the larger half of the Standard & Poor’s 500 Index by Frederic W. Cook & Co., a compensation consultancy, reported that 90 percent of these companies include stock options in their executive pay.

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