Tech Firms Offer Plan for Expensing Options

A group of technology companies Tuesday renewed pressure on accounting rule makers to drop a stock-options expensing rule and unveiled an alternative that they said was easier and less expensive to adopt.

Cisco Systems Inc. joined Genentech Inc. and Qualcomm Inc. in developing the proposal. It would value stock options using a model that results in costs that are an estimated 70% lower than under the proposed accounting rule.

The companies will outline their plan to the Financial Accounting Standards Board today, marking the latest skirmish in an ongoing battle with the accounting standards-setter.

If the FASB rejects the plan, Cisco and its allies are betting that they will have new ammunition to persuade Congress to intervene.

Companies “are trying to exhaust every non-legislative remedy,” said Jeff Peck, who lobbies on behalf of the companies.

The FASB has tried for more than a decade to require companies to treat stock options as an expense, just as compensation and bonuses are. Its expensing rule will take effect at the end of the year unless it delays action, withdraws the proposal or Congress steps in.

Companies have threatened to stop issuing stock options if they are forced to deduct the cost of the options in their financial statements.

The House on July 20 voted 312 to 111 to override the FASB, passing legislation to dilute the options-expensing rule, but the bill faces long odds in the Senate.

The tech-company plan unveiled Tuesday includes language saying that when a company calculates the expense of options issued to employees, it may assume that the price of the stock underlying the option would rise or fall by an amount that is tied to past movements in the Standard & Poor’s 500 index.

The expected volatility of a stock option -- the amount by which the underlying stock rises or falls -- is one of the most important determinants of the cost of the option.

Technology company stock prices have historically been more volatile than stock prices of more traditional companies. The greater the volatility, the greater the cost of issuing stock options.