Global Investor Urge US Option Expensing

July 7, 2004 ( - Eighteen global international institutional investors have sent a letter to the US Financial Accounting Standards Board (FASB) urging for the implementation of mandatory stock option expensing regulations.

“We applaud the FASB’s courage in championing this controversial and much-needed reform,” the joint letter from the Ontario Teachers’ Pension Plan and other institutional investors said, seeing stock option expensing as a path to clarity in financial documentation.   “We firmly believe that financial reporting standards should be shaped solely by what provides the most relevant, comprehensive information about a company’s financial condition – not by what results in the most attractive reported numbers.”

The groups, which collectively manage approximately US$3.5 trillion, warn  that the US will be out of step with the global investment community if it does not adopt FASB proposals for the mandatory expensing of options.   Further, the groups warn failure to adopt such a mandate would adversely impact their US-based investments, which the global investment group, that includes institutional investors from Canada, Australia, the Netherlands, Norway, Sweden and the UK, said has already been harmed by recent financial skullduggery.  International investors have collectively lost billions from recent U.S. corporate scandals, including ones resulting from fraudulent and misleading financial statements,” the investors said in the letter.

“We are concerned about the political pressure on FASB to withdraw or amend this proposal which would be a significant step backwards,” said Robert Bertram, Ontario Teachers’ Executive Vice-President, Investments. “Shareholders have the right to know how stock option plans, which can seriously dilute shareholder value, will affect the company’s bottom line.”

Investors from the US and across the globe have come out both for and against FASB’s March 31 mandatory stock option expensing proposals.   Under the Exposure Draft , 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 ). 

Opponents to the measure though warn of the potential negative impact such a mandate would have on companies that rely on broad-based stock option plans to lure employee talent.   Recently the US House of Representatives Financial Services Committee approved a bill to delay implementing any standard for a year, until completion of an economic impact study by the federal departments of Labor and Commerce.  The bill would also restrict any option-expensing standard from FASB to options granted to the top five officers of a company (See  FASB Options Expensing Limit Bill Gets Committee OK ).

FASB held a round of hearings last week to consider its proposal to mandate expensing of employee stock option plans ahead of the close of the public comment period on the board’s option mandate.  The FASB will now hand down a final version of the proposal that must then be ratified by the US Securities and Exchange Commission (SEC).