Major Fight Looms Over Options Accounting

Congress and corporate America may soon reprise a major battle over accounting practices for stock options.

Among the far-reaching reforms proposed in the wake of the Enron Corp. debacle, some legislators want to force companies to begin recording the cost of stock options granted employees, or lose hundreds of millions of dollars in tax breaks.

Companies now can choose simply to disclose the value of so-called nonqualified stock options when they are issued to employees, rather than officially charge that cost against earnings. Either way, a company can take a tax deduction for the amount.

A bill introduced in the Senate last week by Michigan Democrat Carl Levin and Arizona Republican John McCain would require the stock option tax deduction to be reflected as an expense on a company’s income statement, reducing reported profit.

Under the bill, if a company doesn’t officially report a stock option expense, it can’t take a deduction on its tax return.

Levin, who tried unsuccessfully to change options accounting in the late 1990s, said the bill would eliminate accounting abuses such as those at the bankrupt Enron, which didn’t reduce reported earnings for options expenses.

“Stock options were a driving force behind management decisions at Enron that focused on increasing Enron’s stock price rather than the solid growth of the company,” Levin said.

Enron paid no corporate income taxes in four out of the last five years, mostly by using tax benefits from stock options, the labor-funded Citizens for Tax Justice reported last month.

But as in the 1990s, the Levin-McCain bill is likely to face fierce opposition. The American Electronics Assn., a trade group representing firms such as Motorola Inc. and Intel Corp., said passage could make companies less willing to use options, making it harder to attract and retain workers.

“Many companies would find the tax and accounting regime of the Levin-McCain bill so onerous that they would discontinue offering options to all but the most senior executives,” said William T. Archey, the AEA’s chief executive.

The Levin-McCain bill also drew criticism from the president of the American Institute of Certified Public Accountants, a trade group. “Accounting standards should be set in the private sector,” Barry Melancon said.

The bill would affect tax treatment of nonqualified stock options, because proceeds from exercising those options are taxable. Employers don’t receive the deduction for granting another form of options, known as incentive stock options.

Other sponsors of the legislation include Sens. Peter Fitzgerald (R-Ill.) and Richard Durbin (D-Ill.).

Fitzgerald said the bill would change accounting standards that may have enabled Enron to overstate earnings per share by as much as 11% in 2000.

“This bill does not reduce earnings. It reduces what companies are reporting as earnings,” Fitzgerald said.

Opponents also include trade associations such as the Software Finance and Tax Executives Council, which represents Microsoft Corp. and Oracle Corp. They contend the legislation would overturn long-standing Financial Accounting Standards Board rules on stock options. And they say that the bill would force companies to estimate the future value of stock options and that this may overstate or understate the value when employees finally exercise them.