Options Proposal Draws Heat
Accounting rule makers on Wednesday proposed requiring corporations to deduct the cost of employee stock options from earnings -- drawing the expected heat from the high-technology sector.
About 70 high-tech executives, in a so-called fly-in staged by the American Electronics Assn. trade group, descended on Washington to lobby Congress to block the long-awaited proposal by the Financial Accounting Standards Board.
The executives, including more than a dozen from Silicon Valley, claim the rule could hurt the economy by making it tougher for firms to attract and retain employees. If they persuade lawmakers, it would be the second time in a decade that Congress has turned aside such a rule.
But thwarting the FASB may be more politically difficult this time around, after the devastating accounting scandals involving Enron Corp., WorldCom Inc. and other companies.
The FASB, a private, industry-financed body based in Norwalk, Conn., said it proposed the change so that investors could more easily see the financial effect of options, an ever-more-popular form of compensation. The group said it would accept public comment until June 30, then put the proposal to a final vote of its seven-member board in the fall. If approved, the rule would take effect Dec. 15.
Under the proposal, publicly traded companies would have to record stock option awards as an expense on their income statements, reducing reported profits. Under current rules, options need only be disclosed in the less-closely-scrutinized footnotes to financial statements.
The rule change would lower reported profits by 6% or 7% for the Standard & Poor’s 500 blue-chip companies, S&P; estimated, but the decline would be far greater for many high-tech firms.
Still, the move isn’t expected to have a big effect on the stock market because investors already are generally aware of the use of options. Goldman Sachs & Co., in a note to investors Wednesday, said the effect on share prices “will be small for most companies.”
The accounting standards board would allow companies to choose between two methods of valuing options to arrive at an expense figure. One is regarded as an elegant mathematical formula, but lacking the flexibility to cope with the complex features of employee stock-option plans, including staggered vesting schedules for when the options can be exercised.
The FASB said it favored another, more flexible method -- a brute-force approach involving millions of calculations that must be performed by computer. But critics say the model’s very flexibility is a weakness. It “requires such a complex and dizzying array of assumptions and inputs that it will create an accounting free-for-all,” said Rick White, chairman of the International Employee Stock Options Coalition, which opposes the FASB proposal.
Rep. Richard H. Baker (R-La.), chairman of the House capital markets subcommittee, said an April 21 hearing was expected to focus on the economic consequences of the rule change. Baker is chief sponsor of legislation that would scale back the measure by requiring firms to expense only those options awarded to their five top executives, not those to the rank and file. The bill would exempt companies from having to expense options at all until three years after an initial public offering of stock.
John Palafoutas, the American Electronics Assn.’s chief lobbyist in Washington, said the visiting tech executives met in small groups with about 75 members of Congress, plus representatives of the White House and the Securities and Exchange Commission. Their goal was to win more sponsors for the Baker bill.
Among the companies that sent representatives were Conexant Systems Inc. of Newport Beach and Epicor Software Corp. of Irvine.
The Baker bill already carries the sponsorship of Sen. Barbara Boxer (D-Calif.), House Minority Leader Nancy Pelosi (D-San Francisco) and Rep. Anna G. Eshoo (D-Atherton), among other Democrats.
However, the legislation may face stiff opposition from lawmakers who feel it represents an improper end-run around the FASB. “This is a necessary reform that will help bring much-needed corporate transparency to stockholders and investors,” Sen. John McCain (R-Ariz.) said in a statement. “Congress should not be legislating accounting rules or threatening FASB’s independence.”
