Financial Services Group Signs Up For Option Expensing

August 13, 2002 ( - A group of banks and other financial services firms have collectively pledged to report stock options as expenses on their corporate balance sheets.

The announcement was made by former New York Congressman Rick Lazio, now president and CEO of the Financial Services Forum, on behalf of 17 of the 18 publicly traded companies in the Forum. The 18th member had agreed to expense stock options earlier.

Companies have resisted the move to expensing  in part because stock-option accounting is complicated, and there isn’t any consistent method for determining option value, which undermines the value to investors of such disclosures.

However, the signing members of the announcement said they look forward to working with the accounting community and regulators to develop a uniform and accurate way of determining the value of stock options.

The participating companies are:

  • Allstate Insurance
  • American Express Company
  • American International Group
  • Bank One
  • Bank of America
  • The Bank of New York
  • Citigroup
  • FleetBoston Financial
  • Goldman Sachs
  • Household International
  • J.P. Morgan Chase
  • Merrill Lynch
  • MetLife
  • Morgan Stanley
  • Prudential Financial
  • State Street
  • Wachovia Corporation

Edward Jones, a privately held company, supported the announcement as well, according to a press release.

Critical Perspective

Critics of the stock-option accounting abound, particularly high-technology companies, which depend on stock options for a big part of employee compensation.  Earlier this week software maker PeopleSoft says it has no intention of expensing stock options.  PeopleSoft CFO Kevin Parker noted that “Stock options are a very powerful tool for aligning shareholder value with the creative talents of employees.”  More than 80% of the 8,500 workers at the firm have been granted options – and senior management has less than 12% of the total.

While there is some dispute about the actual impact on corporate earnings (see Companies Expensing Options Voluntarily Suffer Mild Earnings Hit ), proponents say subtracting the value from earnings in the profit-and-loss statement makes it easier to understand for investors, who don’t have the sophistication to wade through dense footnotes.

Public companies are currently required to disclose the value of stock options in footnotes to their annual reports, but few until now have opted to subtract the value from earnings.

Last week, the FASB tentatively agreed to explore three methods under which companies could voluntarily expense stock options (see FASB Studies Three Option Expensing Paths ).

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