Accounting board to issue new stock-options mandate
Sunday March 28, 3:35 pm ET
By Marcy Gordon, AP Business Writer
WASHINGTON (AP) -- Once criticized as spineless in the face of lawmakers' pressure, the rule-setting board for corporate accounting is poised to make a move with profound consequences for companies' profits and executive compensation.
If the Financial Accounting Standards Board has its way, companies as soon as next year would be required to deduct the cost of stock options given to executives and employees from the bottom line. That would be among the most far-reaching steps that the private rulemaker has made in its 30-year history.
But this isn't expected to be an easy win.
A decade ago, the board's attempt to push similar changes was blocked by Congress. Opponents of expensing -- especially high-tech companies that donate heavily to both parties -- are staging an all-out effort for a repeat.
Companies currently don't have to record as an expense the cost of options on their income statements. Instead, they must include the potential cost in a footnote, making it difficult for investors to gauge their effect on earnings.
Bipartisan legislation would limit any required expensing of options to those owned by the top five executives in a corporation. It would also prevent a new FASB mandate from taking effect until the economic impact was studied.
Stock options are blamed by some for aiding corporate abuses in recent years by enticing executives at companies like Enron and WorldCom to manipulate earnings to boost the stock price and then sell their lucrative personal holdings.
Still, options remain a popular compensation tool to help motivate employees. They can buy shares at a fixed price and sell at a profit if the company's stock rises.
FASB is largely funded by the accounting industry, and is expected as soon as this week to propose a new rule in draft form.
Opponents warn that requiring a deduction of options costs from earnings would stifle economic growth. They also contend that valuing those costs is far too subjective and would fill financial statements with inaccurate information.
The lobbying coalition includes Agilent Technologies, Cisco Systems, Coors Brewing, Dell, General Mills, Intel and Sun Microsystems. Also involved is the Nasdaq Stock Market, home to numerous big high-tech companies; the National Association of Manufacturers; and the Business Roundtable, which represents chief executives of the largest U.S. corporations.
For corporate governance advocates, limiting mandatory counting of options to a company's top five executives would not provide a true cost picture.
"If you wanted to rename this (legislation), it would be the 'Pander to tech companies that fill my campaign coffers'" bill, said Patrick McGurn, a special counsel for Institutional Shareholder Services.
FASB Chairman Robert Herz has told lawmakers that if Congress moved against the board's action on options, it "would be in direct conflict with the expressed needs and demands of many investors."
The chairman of the Securities and Exchange Commission, William Donaldson, and Federal Reserve Chairman Alan Greenspan support mandatory expensing.