Options Debate to Continue When Congress Reconvenes
Troy Wolverton
09/01/04 - 07:14 AM EDT
The debate on expensing stock options is about to reach a climax.
The Financial Accounting Standards Board, which sets accounting standards, has promised to put out a final rule as soon as October that would require public companies to recognize the cost of options on their income statements. But expensing opponents will have a chance to derail that rule when the U.S. Senate reconvenes next week.
Last month, the U.S. House of Representatives
voted overwhelmingly to override the expensing rule. The vote came shortly before Congress' summer recess, so the coming session will essentially be the Senate's first chance to deal with the issue since the House vote.
Despite the summer lull in the halls of Congress, the fighting over options has continued outside.
Earlier this month, William Donaldson, the chairman of the
Securities and Exchange Commission sent a letter to Senate Majority Leader Bill Frist, R-Tenn., and 15 other senators, urging them not to follow the House's lead by interfering on the options expensing issue.
Meanwhile, FASB itself has continued to deliberate the issue. The regulatory body held two board meetings earlier this month to discuss the particulars of its options expensing proposal.
Under current accounting rules, companies can choose how to recognize the cost of options when they grant them. Many companies, particularly those in the technology and Internet industry, have chosen to recognize only the intrinsic value of the options at grant, which in most cases is zero.
But more than 500 companies have now chosen an alternate method. These companies, which include
Amazon.com (AMZN), have chosen to expense the estimated lifetime value of the options they grant. Depending on the size of the grants, such expenses can run into the tens of millions of dollars.
The FASB proposal would require all public companies to recognize the estimated, or fair, value of the options they grant, beginning with fiscal years starting after Dec. 15.
Advocates of the rule change say it would make companies' financial statements more honest and accurate, recognizing that companies confer real value to employees when they issue them options. Because it would require the cost of options to be more readily apparent to shareholders, the rule would force companies to be more conservative in issuing options, advocates say.
Expensing hawks link the liberal use of options to the Enron scandal and other corporate fiascos. Because they reward short-term movements in the stock, options encourage corporate executives to take short-sighted or potentially illegal steps to push stock prices upward, critics say.
But supporters of options have argued that companies already disclose the estimated cost of options as a footnote within their financial reports. They warn that such estimates often overstate the value of options to employees and fail to recognize cases when options expire unused.
Such boosters of options have warned that by forcing companies to expense options, regulators would effectively curtail their use. That could hurt start-up and technology companies that widely distribute options to all levels of workers, they say.
Expensing opponents have managed to derail similar reforms in the past, most notably a decade ago, when Congress threatened to intervene at the technology industry's behest.
History appeared to be repeating itself when the House voted on the issue last month. The bill passed by the body would limit expensing to public companies' top five highest-paid executives. But in calculating that expense, the bill would require companies to assume that their stock would have no volatility, essentially eliminating any potential value of the option.
The bill would prohibit any further options expensing until after the Commerce and Labor departments produce a joint study on the potential impact of such a rule.
Although an analogous bill in the Senate already has more than 20 co-sponsors, most political observers have given it little chance of passing. Sen. Richard Shelby, R-Ala., has said he is dead-set against the bill. Given that he is the chairman of the Senate committee that has jurisdiction over it, Shelby's opposition could well keep the entire body from ever voting on it.
But this being an election year, even those who doubt the bill's chances won't say they are nil. Supporters of the bill could attempt to force a floor vote on the bill or tack it as an amendment to another bill once the Senate reconvenes on Sept. 7.
"The odds are really against it," said one political analyst who closely follows legislation on Capitol Hill. But the analyst added, "I hate to say, 'never.'"
Given that chance, however slight, expensing proponents have been pushing hard to get the Senate to support FASB's proposal by staying on the sidelines.
In that vein, Donaldson submitted his letter to the senators on Aug. 19, where he noted that FASB's deliberation on the issue has been open and extensive, and he argued that supporting FASB was "critical to the restoration of public confidence in the integrity of financial reporting."
"I believe strongly that the FASB's consideration of this proposed standard regarding stock options should be allowed to run its full course," Donaldson wrote.
