Panel considers changes in accounting for options

March 09, 1994|By Bloomberg Business News

STAMFORD, Conn. -- Companies next year will have to estimate the value of the stock options they grant their employees and deduct that value from earnings. The only question is how much they'll have to deduct.

That's the view of the seven members of the Financial Accounting Standards Board after two days of public hearings on its accounting proposal for stock options.

If the FASB holds its ground, its final statement on the issue could touch off civil war among normally peaceful accountants and threaten the future of the FASB itself. That's because the FASB's opponents are preparing to lobby in Congress for what they were unable to achieve in debate with the FASB.

The FASB, a private organization funded by the big accounting firms and other companies, derives its authority to set accounting standards from the Securities and Exchange Commission.

The rule that touched off the dispute would require companies to estimate the value of the stock options they grant their employees and deduct that value from earnings. The board is acting on the belief that companies grant stock options and employees accept them as a means of paying them. The cost of compensating employees is treated as an expense and deducted from a company's earnings.

The FASB has been swamped with letters and comments from those opposing the plan on grounds ranging from bad accounting to bad public policy. But the board hasn't heard anything to cause it to abandon the project, the FASB board members said.

"A final statement will emerge," said Joseph Anania of the FASB. "I just can't predict how the measurement issue will be resolved."

That may sound bland. To some corporate types, they're fighting words.

"If you go forward with this proposal, you will open a Pandora's Box of setting accounting standards through legislation," Nicholas Calise of the American Society of Corporate Secretaries said.

The box may be open already. At least four U.S. senators support a bill by Sen. Joseph Lieberman, D.-Conn., to direct the SEC to ignore any rule by the FASB on accounting for stock options.

Under current rules, the FASB establishes generally accepted accounting principles, or GAAP. Companies must follow them when reporting financial results. Companies must conform to GAAP if they wish to have their stock traded on public exchanges in the United States. FASB pronouncements thus have the rule of law for publicly traded companies.

Some opponents of the rule, including Thomas Sheehan of Grafton State Bank in Grafton, Wis., who appeared on behalf of the Independent Bankers Association of America, maintain that it's impossible to accurately determine the value of a stock option. For that reason, he said it was better to retain the current accounting system, which values stock options at zero.

Several FASB board members said they found it difficult to believe that companies are unable to even reasonably estimate the value of options.

"It seems about impossible to give out options and say you don't know what they're worth," said Robert Northcutt. "Some notion of relative value must exist, or otherwise how would you know whether to give 100 options or 100,000?"

Public hearings will resume March 21 and 22 in Norwalk, Conn., and conclude March 25 and 26 in San Jose, Calif.

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