A bipartisan group of senators has offered compromise legislation that would require publicly traded companies to include in expense statements stock options for their top employees.
The bill was introduced in mid-November by Sen. Mike Enzi, R-Wyo., the Senate's only accountant, along with Sens. Harry Reid, D-Nev.; John Ensign, R-Nev.; Barbara Boxer, D-Calif.; and George Allen, R-Va.
Under the legislation, companies that file financial statements with the Securities and Exchange Commission would have to treat as expenses on their financial statements stock options for their chief executive and the next four most highly compensated executives. Companies would not have to expense stock options for all other employees.
Small businesses would be exempt from the requirement. Companies would not have to start expensing stock options until three years after their initial public offering.
Opposition to Expensing
The bill contains other stipulations on how stock options would be expensed. It would prevent the SEC from recognizing any expensing standard unless it showed the true expense of the stock option on a company's financial statement when the option was exercised, expired or was forfeited.
The bill also requires that if existing stock valuation models such as the Black-Scholes or binomial methods are used, the volatility of the underlying stock option must be considered zero. On the Senate floor, Mr. Enzi said that the requirement was included in the bill "in light of the extreme inaccuracy of existing stock valuation models."
In his statement, he criticized the Financial Accounting Standards Board in Norwalk, Conn., which is moving toward requiring companies to treat stock options as expenses on their financial statements.
Mr. Enzi charged that it is "evident that FASB is not listening to small businesses and not taking their concerns seriously about a standard that FASB board members stated was 'set in concrete' prior to an official comment period on any draft proposal."
"That isn't true," says Sheryl Thompson, FASB spokeswoman. "We hold public board meetings. Our outreach continues throughout the year through exposure drafts and comment letters. That feedback cuts across all constituencies, small and large."
Small businesses, particularly high-tech startup companies that routinely offer stock options as an enticement to executives and employees, oppose expensing. They argue that expensing would make stock option compensation prohibitively costly, and they say it would be difficult to attract and retain good employees without the options.
Mr. Enzi said he supports the FASB's independence. But, he said, "if FASB is going to earn its independence, it will have to adhere to a process that is objective, fair, open and balanced. So far, FASB seems to be more concerned about getting the job done than in getting it right."
Ms. Thompson says the bill would breach the FASB's neutrality. "It's best to let the FASB do its job, which is setting standards for U.S. public companies, rather than seeing politicians, i.e., members of Congress, get involved in accounting standards setting. Political interference doesn't improve the accounting standards-setting process."
Choices available
Currently, companies can treat the options as expenses on their financial statements or they can include a "pro forma" disclosure in the footnotes to their statements indicating what the charges would have been had they been taken.
Most companies do the latter, which makes it more difficult to know the impact of their options on their finances. However, several hundred companies have started expensing the options recently.
Gerald Weiss, a certified financial planner and owner of Weiss Financial Planning in Dublin, Calif., likes Mr. Enzi's proposal. Mr. Weiss has many high-tech professionals who work in Silicon Valley as his clients, and he says much of their retirement income is from stock options. He does not favor expensing options.
Patrick McGurn, senior vice president and special counsel to Institutional Shareholder Services Inc. in Rockville, Md., says the legislation "compromises comparability, which shareholders hope to get when all companies are required to expense options."
