GAAP and IFRS

Cox, Sarbox, and FAS 123R

''The door is wide open to the handling of implementation issues'' by the new chairman of the Securities and Exchange Commission.
Ed ZwirnAugust 1, 2005

At last week’s confirmation hearing before the Senate Banking Committee, Securities and Exchange Commission chairman-to-be Christopher Cox called vigorous enforcement of securities laws his “top priority” and affirmed his support for a new rule requiring that stock options be expensed.

Yet in the hearts of those who would have it otherwise — on the issue of stock options, at least — hope springs eternal.

Smoothing the way for the committee’s approval last Thursday, and his confirmation by the full Senate on Friday, were Cox’s assurances that he does not intend to roll back regulatory initiatives including the Sarbanes-Oxley Act and FAS 123R. That latter rule, issued by the Financial Accounting Standards Board, requires most public companies to expense stock options beginning with their first fiscal year starting after June 15. “I will ensure that the Securities and Exchange Commission builds upon the record as already established and that the rule is implemented as the markets expect,” said the nominee.

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However unequivocal that testimony may appear, interested parties who felt a regulatory squeeze during the tenure of outgoing SEC chairman William Donaldson may still be hoping for some wiggle room under Cox. Indeed, the background of the California congressman — who last year co-sponsored an unsuccessful bill that would have limited options expensing to the top five officers of a company and delayed FAS 123R’s implementation — is a study in contrasts. A consummate Wall Street attorney, in the 1980s Cox took a few years off from his securities-law work at Latham & Watkins to lecture at Harvard Business School. He also pursued more-esoteric projects, such as launching an English-language edition of Pravda — then the official newspaper of the Soviet Union — then served three years as senior associate counsel to President Reagan.

Mark Heesen, president of the National Venture Capital Association and a member of the International Employee Stock Options Coalition, says he understands why Cox felt the need to “take off his congressional hat and put on his regulatory hat” at the Senate hearings. But he also calls on Cox — “a very sharp guy” — to take a fresh look at the implementation of Sarbanes-Oxley, particularly its effect on newly public companies and on private companies that aspire to go public.

“Every chairman makes his mark on the commission,” he says, with clear hopes that FAS 123R will provide Cox with an early opportunity. “He’s not going to change the existing rule,” acknowledges Heesen, but “that doesn’t mean that he won’t be implementing it differently.”

Another IESOC member, Jeffrey Peck of the Washington, D.C., lobbying firm Johnson, Madigan, Peck, Bolland & Stewart, was even more forthright in predicting the unpredictable for a Cox chairmanship. Given his background as a securities lawyer, Cox is “not someone who needs a bunch of staff people telling him what generally accepted accounting principles ought to be,” says Peck.

And although FAS 123R is in place, Peck maintains that “the door is wide open to the handling of implementation issues.” He also hopes that as chairman, Cox will prove “more open-minded about different valuation methods like the Cisco proposal,” which would value options by creating a tracking security, rather than relying only on Black-Scholes or binomial valuation methods. “FASB’s work is done,” says Peck; “now it’s the SEC that’s in charge of reviewing financial statements and making sure they comply with GAAP.”

In FASB business, last week the board released updates of two projects to reflect the board’s recent deliberations. One release, concerning Other Than Temporary Impairment, follows up on the board’s decision to issue a staff position affirming the impairment provisions of FAS 115, the standard that governs much of the treatment of debt securities for profit-and-loss and balance-sheet purposes.

Another release essentially refuted a proposal that would have allowed the creditworthiness of derivatives issuers to be considered when determining the fair value of a derivative. Affirming the principle that the market — when there is a market — is the fairest judge of value, the board stated that “the price in an actual transaction for an asset or liability involving the entity is presumed to reflect the fair value of the asset or liability at initial recognition, absent persuasive evidence to the contrary.”

Looking ahead this week, FASB will meet Wednesday at 1 p.m. in session with representatives of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. Participants will consider clearance of a proposed AICPA statement of position on Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts.