Congress Weighs in on Both Sides of Options Expensing

February 14, 2003 ( - For the second time in a decade, the US accounting standards board finds itself under intense pressure to back off of a proposal to make companies take the value of their stock option programs off their earnings statements.

In the latest development, a 40-member group from the US House of Representatives, led by Reps. David Dreier (R-California) and Ann Eshoo (D-California  is trying to block the new options accounting rule by the Financial Accounting Standards Board (FASB), which regulates the accounting profession.  

In response, Sens. Carl Levin (D-Michigan), John McCain (R-Arizona), and Representative Pete Stark, (D-California), along with 30 members of Congress, sent the FASB a letter pushing for “an honest accounting standard that would require all employee stock option compensation to be shown as an expense on corporate financial statements.”

The proposed rule would require companies to include the value of their options program on their regular financial statements.

FASB now has the issue on a March meeting agenda so it can decide whether to proceed. FASB is currently working with its international counterpart, the International Accounting Standards Board (IASB), to develop standards that are compatible for domestic and international companies (see  FASB, IASB Study Convergence Items ).

Last November the IASB released a proposal for stock option accounting that would require companies to estimate the fair market value of stock options from the date of grant. Companies would then have to disclose how they arrived at the fair value measurement (see  IASB Releases Option Expensing Proposal ).  

Under current US guidelines, companies can choose to subtract the expense of stock options from their income statements or disclose their theoretical value in the footnotes of their financial statements.   With the exception of a handful of early volunteers and the approximately 130 recent converts, most companies opt to record the expenses in their footnotes (see  Fewer Companies Volunteer Stock Option Expenses ).

Accounting Meltdowns Reframe Options Debate

The big difference between the two bouts of intense FASB lobbying were the intervening accounting meltdowns that occurred at Enron and WorldCom – as well as at a number of other corporations since then – that have changed the stock options debate. It has gone from an academic discussion of accounting principles to a dogfight over public disclosure of some of a corporation’s most sensitive information.

The issue pits companies such as high-tech start-ups that don’t want to saddle their earnings statements with an expense they’ve traditionally been able to keep off the books. On the other side are corporate governance experts who argue that the use of stock options as executive compensation allows companies to inflate earnings by hiding a real expense.