FASB Chief: Expensing Proposal a Needed Change

April 21, 2004 (PLANSPONSOR.com) - The nation's chief accounting rulemaker on Tuesday defended during a U.S. Senate appearance a highly controversial plan to make companies expense employee stock options.

Financial Accounting Standards Board (FASB) Chairman Robert Herz told the Senate Governmental Affairs financial management subcommittee that option expensing is necessary because it “is a cost to the company and that cost to the company should be measured just like any other cost,” the Associated Press reported.

However lawmakers and high-tech leaders don’t see things that way, predicting that the expensing would produce dire consequences for workers, small businesses and the economy. Senator Barbara Boxer, (D-California) said the rule would hurt regular workers who rely on stock options as part of their compensation package. “You think you’re doing this great thing to punish the fat cats. This is a huge matter that’s going to impact the lives of real people,” she said.

As things now stand, companies must disclose the estimated costs of issuing stock options in footnotes to their financial statements. FASB contends this allows companies to hide their true worth from investors and, last month, the rulemaking body proposed to require the options to count against a company’s bottom line. That would¬†dramatically reduce the earnings of many well-known companies, particularly in the high-tech industry.

Options expensing supporters claimed that the current rules contributed to recent corporate scandals by giving executives an incentive to manipulate earnings so they could drive up their company’s stock price and reap huge windfalls. The Enron scandal “probably could not have happened but for the role of stock options,” said Senator Carl Levin, (D-Michigan) one of several subcommittee members who said they supported the proposed change.

Critics said the proposal would punish employees, stifle economic growth and harm companies’ ability to grow and attract talented workers. They also said it’s impossible to put an accurate value on the cost of the options, contending attempts to do so are largely based on estimates about the future.

“A financial statement that values an option that doesn’t vest for five years at the same price as an option that vests in 24 hours is a financial statement that is inaccurate and misleading,” said Senator Bob Bennett, (R-Utah).