The rule-setting board for accounting on Wednesday moved toward requiring companies to deduct from the bottom line the cost of stock options given to executives and employees, an action with profound consequences for profits and executive pay in Corporate America.
The Financial Accounting Standards Board announced a proposal to require publicly-traded companies to record as a compensation expense all forms of share-based payments to employees, including employee stock options. The value of this stock compensation would “generally be measured at fair value at the grant date.”
It was among the most far-reaching steps that the private rulemaker, located in Norwalk, Conn., has made in its 30-year history. The proposal is open to public comment until June 30 and was expected to take effect next year.
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 their effect on earnings.
“The proposal seeks to improve existing accounting rules and provides more complete, higher quality information for investors,” FASB said in a statement announcing the draft.
Stock options are blamed by some for aiding the corporate abuses of recent years, by enticing executives at companies like Enron and WorldCom to manipulate earnings to boost the stock price and then sell their lucrative personal holdings.
In 1994, the FASB’s attempt to push through a similar change was blocked by lawmakers. Now opponents of mandatory expensing of options — especially high-tech companies that donate heavily to both parties — are staging an all-out effort legislative and lobbying effort to head off the move.
Bipartisan legislation gaining strength in the House would limit required expensing of options to those owned by the top five executives in a corporation. It would also prevent a new FASB mandate from taking effect until an economic impact study was done.
Stock options remain a popular compensation tool that many companies, namely those in the technology business as well as at startup firms, use as way to motivate employees. They allow employees to buy shares at a fixed price and then sell them at a profit if the company’s stock rises.
Critics of expensing have charged that the models used to value the cost of the options are far from precise, are largely based on estimates about what the future holds and would fill financial statements with inaccurate information. They also contend expensing options would stifle economic growth.
