Financial Execs Back Options Plan

August 24, 2004 ( - Most US senior financial executives back a controversial plan by accounting rulemakers to force public companies to expense their stock option programs.

A new survey by accounting firm Grant Thornton found that nearly three quarters of respondents (71%) backed the Financial Accounting Standard Board’s (FASB) options expensing plan, according to a news release.

“By expensing stock options, you’ll improve the reporting of true economics, and you’ll also put all incentive plans on an equal footing,” said Edward Nusbaum, Grant Thornton chief executive officer, in the announcement. “This will most likely lead to incentives other than traditional fixed stock options being used, which may be better suited to coordinate the incentives of the employees with the returns to shareholders.”

The poll also found that more than three-quarters of respondents believe there should be global accounting standards (76%) and that 70% felt greater transparency is needed in financial reporting. In addition, more than half (52%) think that accounting firms should not document internal controls while performing an audit. Other results included:

  • some 62% opposed quicker disclosure of insider trading at public companies
  • 80% backed a principles based approach to accounting standards
  • 76% supported the need for a comprehensive revenue recognition statement
  • 48% said they had no problem with an accounting firm doing the audit and assisting with documentation of internal controls; 52% opposed the idea
  • 83% didn’t object to accounting firms doing both audit and tax work for a company.

The survey was conducted by The Strategy, Execution, and Valuation in the Kellstadt Graduate School of Business at DePaul University, and surveyed 101 senior financial executives at public and private firms.

Under FASB’s Exposure Draft issued on March 31, 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 the 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.