Lawmakers Question the Expensing of Stock Options

More than a dozen U.S. lawmakers are contesting proposals under review by regulators that would require companies to list stock options as an expense deducted from earnings.

The House and the Senate are reacting to a decision this month by the Financial Accounting Standards Board to develop new options accounting rules within a year.

The lawmakers questioned how expensing options, whose value depends on stock performance, can be calculated. They said listing options as expenses also could be harmful to many high-tech and small companies that use options to attract workers.

“It is an important recruiting tool,” said Rep. Anna G. Eshoo (D-Atherton). Workers at these companies use options “to buy houses, cars, to pay off their graduate school expenses, whatever our day-to-day life entails.”

Eshoo and Rep. David Dreier (R-San Dimas) introduced a bill Thursday to require the Securities and Exchange Commission not to recognize as standard accounting practice any listing of stock options as an expense.

“The expensing of stock options would be put on hold as an accounting standard by FASB until we examine what this particular issue means to our national economy,” Eshoo said.

“They seem to be quite predetermined to do this.”

Thirteen senators wrote SEC Chairman William Donaldson on Thursday asking that the commission study whether current methods for valuing options give investors accurate information about company finances.

“There can be little doubt that financial and accounting professionals and other experts have fundamental concerns about the ability to accurately value stock options,” the letter said.

“Investor protection now demands that the SEC undertake this important research to ensure that any decision-making by the FASB is based on an impartial review of all the facts.”

The push to require companies to list options as an expense gained momentum after accounting scandals at Enron Corp. and other companies at which inflated earnings helped executives reap millions of dollars in stock option profits. More than 150 U.S. companies, including Coca-Cola Co. and Wal-Mart Stores Inc., now treat options as a salary cost.

However, the proposal has drawn opposition from Silicon Valley, where technology firms have complained that expensing stock options -- a favored form of compensation -- would distort their reported earnings.

“There is flip side to this, and that is that there are many companies, especially in the high-tech sector where up to 90-some percent of rank-and-file employees get stock options,” Eshoo said.

The SEC is considering a rule proposed by the New York Stock Exchange to require companies with shares traded on the exchange to hold shareholder votes on option plans.

Current U.S. accounting rules require companies to include an estimate of option costs in footnotes to income statements in annual reports. Moving that expense to income statements may erase millions of dollars from corporate earnings.

The bill sponsored by Dreier and Eshoo would require companies to report in “plain English” the effects of their stock options awards, especially how much they dilute the value of stockholders’ shares. The bill also would require the SEC and the Commerce Department to study the effect and clarity of company reporting on stock options.

The measure is subject to committee hearings and approval before it can go the House floor for a vote.