Accounting & Tax

Greenspan Endorses Expensing Options

''I think it would be a bad mistake for Congress to impede FASB,'' adds the Fed chairman.
Stephen TaubApril 22, 2004

Federal Reserve Board chairman Alan Greenspan stated on Wednesday that he supports the Financial Accounting Standards Board’s proposal that corporations expense the value of stock options.

In testimony to Congress’s Joint Economic Committee, Greenspan said that not expensing stock options gives a distorted view of profitability, according to Reuters.

The Fed chief acknowledged that the House of Representatives is considering a bill that would defer enforcement of FASB’s rule until the Securities and Exchange Commission studies its economic impact. Noted Greenspan, “I think it would be a bad mistake for Congress to impede FASB.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Rep. Richard Baker (R-La.), the sponsor of that legislation, said Tuesday, “We must keep in mind that for many of our most exciting new companies, employee stock options are essential for future growth. So we need a balanced approach, one that demands sound corporate governance but also helps all employees and safeguards American competitiveness and the incentives for ingenuity.” And Sen. Joe Lieberman (D.-Conn.) said that changing the accounting treatment for options would force companies to eliminate them as compensation for the majority of employees.

Not surprisingly, the Semiconductor Industry Association agrees. On Wednesday it issued a press release expressing concern that a requirement to expense options could make it harder for the industry to attract and retain talented employees.

In previous testimony before the House Financial Services Subcommittee on Capital Markets, SIA president George Scalise maintained that “the FASB proposal does not provide an option pricing model that allows for accurate valuation.” Scalise also noted that SIA member companies typically grant 80 to 95 percent of options to non-executive employees. “A possible unintended consequence of an accounting rule that does not assure transparent, accurate, and comparable information on the cost of employee stock option and stock purchase plans would be that many U.S. semiconductor companies would drastically cut back or entirely discontinue such plans,” he said.

“Other regions, notably China and Taiwan, have recognized the importance of stock option plans in attracting talented employees and aligning their interests with the interests of investors,” continued Scalise. “Given the fact China and Taiwan do not even tax employee options, U.S. companies are already facing difficulty in head-to-head competition for specific employees.”

On the other hand, Sen. Peter Fitzgerald (R.-Ill.), chairman of the Governmental Affairs Financial Management Subcommittee, said he would work to support FASB’s proposal. “Expensing should be mandatory,” said Fitzgerald, according to reports. Congressional interference in 1993 resulted in disastrous consequences.” Added Sen. Carl Levin (D-Mich.), “Without an independent FASB, we are going to be politicizing accounting rules. We should not intervene and say we know better than FASB.”

And FASB Chairman Robert Herz stressed to attendees that only an independent FASB can maintain the integrity of the nation’s accounting system, according to wire service reports.

“While current efforts by certain parties to block improvements to the accounting for equity-based compensation may seem attractive to some in the short run, in the long run biased accounting standards are harmful to investors, creditors and capital markets and the U.S. economy,” said Herz.