The standards setter for the U.S. accounting industry recommended yesterday that companies begin counting employee stock options as a business expense next year, a proposal that would wipe out billions of dollars in corporate profits and crimp executive pay.
The much anticipated bookkeeping change would address a long-standing controversy over the accounting treatment of stock options, which in the 1990s became a favorite form of employee compensation at many companies, especially in the technology industry.
Options give workers the right to buy a number of company shares at a set price over a certain period of time.
But in its draft rule, the Financial Accounting Standards Board did not specifically set forth a method for valuing stock options, an omission that will re-ignite debate in the months ahead.
"The bigger issue is what is fair value," said Charles M. Elson, a corporate governance expert at the University of Delaware. "FASB still hasn't answered that."
Currently, expensing options isn't mandatory, though a handful of companies, including Bank One Corp. and Boeing Co., do so voluntarily. U.S. companies are required to disclose stock-option pay in footnotes to their financial statements.
In recent years investors have called for greater disclosure in financial reports in the aftermath of corporate scandals in which stock options epitomized corporate greed. Options were blamed for encouraging executives to cut corners - or, as some critics contend, engage in outright fraud - to temporarily raise the stock price and cash in.
"I want to have clear accounting and transparency," said Thyra E. Zerhusen, managing director at Optimum Investment Advisors in Chicago. "It's just easier to compare companies."
The accounting standards board's proposal is open to public comment until June 30; if approved, it would be effective for the fiscal years beginning after Dec. 15.
The bookkeeping change has met considerable opposition from the technology industry, where option grants have been far more generous than in the rest of corporate America. Tech titans view options as key to spurring innovation by motivating employees.
They are staging an all-out legislative effort in Washington to head off the move. Yesterday, more than 70 technology executives met with members of Congress in a coordinated lobbying campaign. Their new argument: Expensing options will hurt job creation.
That's a red herring, say advocates for the change. "Executives' real interest is in protecting their own compensation," said Patrick McGurn, special counsel for Institutional Shareholder Services, a leading provider of proxy voting and corporate governance services.
While the tech lobby is using defense of U.S. jobs as an argument against expensing options, it also is trying to convince Congress not to impose restrictions on moving jobs abroad, he said.
There's another reason why companies don't want to account for options as a cost on their income statements. A study by Merrill Lynch & Co. Inc. shows that options costs would have reduced 2002 earnings at technology companies by about 61 percent.
The International Accounting Standards Board already has ruled that companies following international standards will have to expense stock options beginning Jan. 1.
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