Principally written by venture capitalist Kip Hagopian, the position paper was aimed at the US Securities and Exchange Commission (SEC) with the request to revoke the Financial Accounting Standards Board’s (FASB) rule (See FASB Hands Down Option Expensing Proposal ), according to Newswise news service. The paper appeared in the summer of 2006 edition of the California Management Review, which is published by UC Berkeley’s Haas School of Business.
According to a news report about the document, the article signatories asserted that the expensing rule hurts and not helps company financial statements. The report said the signatories included three Nobel Prize winners in economics, two former CEOs of Big Four accounting firms, two former US Treasury secretaries and prominent academics.
“Mandating the expensing of employee stock options is one of the most radical changes in accounting rules in history, and we believe the FASB and the SEC have made a mistake,” said Hagopian, in the news report “We are concerned that the SEC did not hold its own hearings on this rule, and we are asking the commission to reopen this issue for review and debate.”
The paper’s conclusions included that:
- an Employee Stock Option (ESO) is a “gain-sharing instrument” in which shareholders agree to share their gains (stock appreciation), if any, with employees;
- a gain-sharing instrument, by its nature, has no accounting cost unless and until there is a gain to be shared;
- the cost of a gain-sharing instrument must be located on the books of the party that reaps the gain;
- in the case of an ESO, the gain is reaped by shareholders and not by the enterprise; so the cost of the ESO is borne by the shareholders. This cost to shareholders is already properly accounted for under the treasury stock method of accounting (described in FAS 128, entitled, “Earnings per Share”) as a transfer of value from shareholders to employee option holders; and
- neither the grant nor the vesting of an ESO meets the standard accounting definition of an expense. Companies do not forgo any cash when they grant ESOs, so their issuance cannot be an opportunity cost.
To order a copy of the position paper go to http://cmr.berkeley.edu/order.html .