- The Washington Times - Sunday, March 28, 2004


The Financial Accounting Standards Board, once considered spineless by some, is poised to make a move with profound consequences for companies’ profits and executive compensation.

The rule-setting board for corporate accounting is likely to propose a rule that would require companies to deduct the cost of stock options given to executives and employees from the bottom line.

That would be among the most far-reaching steps that the private body has made in its 30-year history, but the task isn’t expected to be easy.

A decade ago, Congress blocked the board’s attempt to push similar changes. Opponents of expensing, especially high-tech companies that donate heavily to both parties, are staging an all-out effort for a repeat.

Companies currently don’t have to record the cost of options as an expense on their income statements. Instead, they must include the potential cost in a footnote, making it difficult for investors to gauge its effect on earnings.

Bipartisan legislation would limit any required expensing of options to those owned by the top five executives in a corporation.

It also would prevent a new FASB mandate from taking effect until the economic impact was studied.

Stock options are blamed by some for aiding corporate abuses in recent years by enticing executives at companies such as Enron and WorldCom to manipulate earnings to boost the stock price and then sell their lucrative personal holdings.

Still, options remain a popular compensation tool to help motivate employees.

Workers can buy shares at a fixed price and sell at a profit if the company’s stock rises.

FASB is funded largely by the accounting industry and is expected as soon as this week to propose a new rule in draft form.

Opponents say requiring a deduction of options costs from earnings would stifle economic growth. They also say valuing those costs is far too subjective and would fill financial statements with inaccurate information.

The coalition lobbying against the change includes Agilent Technologies, Cisco Systems, Coors Brewing, Dell, General Mills, Intel and Sun Microsystems.

Also involved is the Nasdaq Stock Market, home to numerous high-tech companies; the National Association of Manufacturers; and the Business Roundtable, which represents chief executives of the largest U.S. corporations.

For corporate-governance advocates, limiting mandatory counting of options to a company’s top five executives would not provide an accurate cost picture.

“If you wanted to rename this [legislation], it would be the ‘Pander to Tech Companies That Fill My Campaign Coffers’ bill,” said Patrick McGurn, a special counsel for Institutional Shareholder Services.

Robert Herz, FASB chairman, has told lawmakers that if Congress moved against the board’s action on options, it “would be in direct conflict with the expressed needs and demands of many investors.”

The chairman of the Securities and Exchange Commission, William H. Donaldson, and Federal Reserve Chairman Alan Greenspan support mandatory expensing.

“Stock options are the 800-pound gorilla that has yet to be caged by corporate reform,” said Sen. Carl Levin, Michigan Democrat. He and Sen. John McCain, Arizona Republican, have pushed legislation to require the expensing of options.

“FASB ought to act as quickly as possible to put an end to dishonest accounting of stock options,” Mr. Levin said.

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