Why Everyone, Save Silicon Valley, Now Favors Expensing Stock Options

They used to deride it as hare-brained. Now it's taken for granted -- outside high-tech circles -- that companies should account for the cost of stock options each quarter.

The conversion of most investors, legislators and accountants to the pro-expensing camp, a long road traveled over a decade, reflects the stock market bust of 2000 and revelations of massive accounting scandals in its wake.

When talk heated up in 1993 about expensing options, Wall Street and Silicon Valley lined up solidly against the idea. Many lawmakers and the major auditing firms soon followed suit, accepting the popular argument that the accounting shift would deal too painful a blow to U.S. companies.

As a sign of the times, in 1993 the Senate voted 88-9 in favor of a resolution, sponsored by Democrat Joe Lieberman of Connecticut, warning that options expensing would have "grave consequences for America's entrepreneurs."

Against broad opposition, the lone voice in support of expensing options -- the Financial Accounting Standards Board, or FASB -- had little chance of prevailing. The fate of options expensing was sealed when a tidal wave of pro-business Republicans swept into office in 1994 elections.

By then, opposition to options expensing was proving so fierce that Securities and Exchange Chairman Arthur Levitt began to fear the FASB would be stripped of its standards-setting powers altogether. In what he now calls his biggest mistake on the job, Levitt pressed FASB to retreat from its support for a rule that would account for the cost of options in corporate income statements.

The FASB later agreed to the weaker rule that is currently in effect, which requires companies merely to make note of their options costs in financial footnotes.

Ten years down the line, many former opponents of options expensing have switched sides, demanding greater transparency in financial statements across the board. (For more about the current trends in options expensing, click here.)