VideoThey're at it again.
A bill that would temporarily prohibit regulators from recognizing standards requiring companies to expense employee stock options gets an airing this week -- much to the chagrin of members of the Financial Accounting Standards Board.
On Tuesday morning, the House Financial Services Capital Markets Subcommittee will hold a hearing on HR 1372, the Broad-Based Stock Option Plan Transparency Act. The bill, introduced by Reps. David Dreier (R-Calif.) and Anna G. Eshoo (D-Calif.) on March 20, requires greater disclosure of corporate stock options.
But the proposed legislation would also commission a three-year study of the effects of such disclosure. During that time, new accounting standards governing options would not be recognized.
The bill's sponsors argue that mandating companies to expense options would effectively eliminate the use of broad-based options plans as an incentive for rank-and-file employees. They also claim such a move would create less accurate financial information for shareholders.
Employee stock options are the only form of stock-based compensation that are not required to be expensed under GAAP.
Not surprisingly, standards-setters at FASB, which has tentatively decided to require companies to book stock options as an expense, strongly oppose HR 1372. Beyond the proposal to stall FASB's final rule from being recognized as GAAP by the SEC, the proposed legislation calls into question the accounting rulemaking body's independence.
Michael Crooch, a FASB board member, tells CFO.com that the FASB is "very concerned" about the bill, which would "disrupt the independent process we use to make, unbiased, objective and neutral decisions." Crooch is also worried that the proposed legislation would set "an unwise precedent that likely would encourage further political intervention in the independent process of setting standards."
As you may recall, the FASB backed away from a requirement to have companies expense stock options in the 1990s. The about-face came under similar pressure from Congress and lobbyists for the high-tech industry.
But Crooch, who will accompany FASB Chairman Robert Herz as he testifies at Tuesday's hearing, is hopeful that several developments in the financial markets have turned the tide in favor of expensing.
He may be right. A growing number of individual and institutional investors have been expressing a desire to see the value of employee options expressed in the income statement as an expense rather than a disclosure in the footnotes. The sentiment has grown particularly strong in the wake of scandals at Enron, Worldcom, and others marquee corporations.
Reportedly, 280 companies are already expensing the cost of employee stock options -- or plan to do so.
Corporate executives are also starting to explore employee compensation alternatives, such as variable options, as a better performance driver than fixed options, Crooch says. There's also seems to be some interest in converging FASB's approach to stock option accounting with the tack taken by the International Accounting Standards Board. Currently, the IASB requires companies to expense stock options.
Opponents of convergence argue that such a move would likely reduce the number of companies that offer the options to employees. Executives at a number of high tech companies -- often big issuers of employee stock options -- claim that stock options align executive and shareholder interests. They also insist that options enable start-ups and fast-growing companies to attract prized workers -- without draining corporate coffers.
Some academics also assert that options are difficult to value for accounting purposes. Attempts to place a value on stock options, they say, could lead to a misrepresentation of company assets. That's an issue which the FASB plans to address as early as this month.
Interestingly, Finance Committee Chairman Richard Shelby recently denied a companion bill to the Dreier-Eschoo effort from receiving a hearing in the Senate. According to Reuters, the chairman said he did not think lawmakers should be interfering in FASB's affairs.
The measure's Senate sponsors, John Ensign (R-Nev.) and Barbara Boxer (D-Calif.), could still try to bring the bill to the floor as an amendment to another piece of legislation, the newswire noted.
Exchanges Look to End Friends and Family Deals
The meteoric rise in price of many hot initial public offerings during the '90s stock market boom is something that regulators would prefer not to see again. In fact, they're advising against it.
An IPO advisory committee formed by the New York Stock Exchange and National Association of Securities Dealers, has made 20 recommendations to boost the public's confidence in the integrity of the IPO process. Exchange officials say investor faith was undercut by "dramatic and immediate run-ups of IPO prices in the immediate aftermarket -- particularly during the bubble period of the late 1990s and 2000," according to a report issued last week.
The committee's review determined that the price spikes (some created artificially) helped create much of the abusive behavior that occurred. Certain underwriters allocated IPO shares to directors and/or executives in exchange for investment banking business (a practice known as "spinning"). Others allocated IPO shares on a potential investor's commitment to purchase additional shares in the aftermarket at specific prices (called "laddering").
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