Donaldson Wants Congress to Stay Out of Stock-Option Expensing Debate

August 30, 2004 ( - Securities and Exchange Commission Chairman William Donaldson has written a letter to 16 US Senators making clear his wishes that Congress stay out of the stock-options expensing debate.

In his letter, Donaldson has warned that the independence of the Financial Accounting Standards Board (FASB) would be at risk if a bill recently approved by the US House was also approved in the Senate, according to the Wall Street Journal. The House bill attempts to override the FASB’s recent proposal requiring companies to expense the value of all stock options. The House wants the expensing rule to only affect a company’s top five officers.

In his letter, Donaldson – who publicly supports stock-option expensing – stated that the bill, if enacted, “would remove certain decision-making responsibility from the FASB and thereby disrupt the independent, private-sector accounting standard-setting process,” according to the WSJ. Donaldson, in his letter, asserted that he wanted Congress to respect the processes established by the FASB, and to let the independent board run its course.

Under the FASB plan, all forms of share-based payments to employees would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award generally would be measured at fair value at the grant date (See  The Bottom Line: Expensing Proposition ).  To arrive at this cost, FASB provided several valuation techniques in its March Exposure Draft, including a lattice model (an example of which is a binomial model) and a closed-form model (an example of which is the Black-Scholes-Merton formula) that would meet the criteria for estimating the fair values of employee share options.

Recently, the FASB has backed off a bit with regards to income taxes for expensing, preferring instead to stick with established rules. However, the FASB remains committed to a fourth quarter release of official rules. (See FASB Modifies Option Expensing Proposal ).