Expensing Stock Options

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FASB requires expensing of stock options
Accounting board rule goes into effect June 15; Tech companies strongly object; Small businesses, others get later starting times
Bloomberg NewsDecember 17, 2004
The body that sets accounting standards for U.S. companies passed a final rule yesterday requiring companies to start counting employee stock options as an expense starting in June.
The rule was adopted over the vehement objections of technology companies that contend the measure will hurt their competitiveness.
The Financial Accounting Standards Board unanimously approved the rule, Chairman Robert H. Herz said at a news conference.
Small businesses won't have to comply with the rule until after Dec. 15, 2005, and closely held companies will have until 2006.
The rule seeks to clarify financial reports by putting the cost of options, now relegated to footnotes in regulatory filings, on a company's income statement.
The rule would have trimmed reported 2003 profit by 8 percent for companies listed on the Standard & Poor's 500, according to a study by Bear Stearns Cos.
But the study found the reductions would have been much larger for technology companies, such as Microsoft Corp., which issue large amounts of options to employees as part of their compensation packages.
Under the new rule, companies must begin calculating the value of options given to employees at the time the securities are awarded and count them as a cost for all financial statements issued after June 15. Options enable a holder to buy stock at a specific price for a set period of time.
The rule is supported by billionaire investor Warren E. Buffett and Federal Reserve Board Chairman Alan Greenspan.
Opponents, such as Intel Corp. chief executive Craig R. Barrett, argue there is no reliable way to value employee options. They warn that expenses may force companies to eliminate the awards to employees.
Stock options have been a "free good" because their cost was omitted, Herz said yesterday. "Once you have the accounting costs, you get a much more robust debate on the appropriate way of compensating executives."
Lobbyists for technology companies plan to press Congress and the Securities and Exchange Commission to preempt the requirement.
"Since FASB is moving ahead with its fundamentally flawed proposal, we sincerely hope the Securities and Exchange Commission will intervene," said Rob Haralson, a spokesman for the for the American Electronics Association, a trade group in Washington. He said association members also will "aggressively lobby" Congress.
The House passed a bill in July that would have limited the cost of options to those awarded to a company's five top executives. The bill died in the Senate amid opposition from Sen. Richard C. Shelby, the Alabama Republican who chairs the banking committee, and Sen. John McCain, the Arizona Republican.
An attempt in 1995 by the accounting board to have options treated as expenses was squelched by computer companies and lawmakers such as Sen. Joseph I. Lieberman, a Connecticut Democrat.
"There still a very strong lobby trying to stop the rule," said G. Michael Crooch, a member of the accounting board, which is based in Norwalk, Conn. "We tried to get everyone's input, so we'd understand the impact of the rule."
About 750 companies already have begun treating options as a compensation expense, or have announced plans to do so, FASB Chairman Herz said. Coca-Cola Co., Wal-Mart Stores Inc. and General Electric Co. are among U.S. companies that have made the switch.
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