Risk & Compliance

FASB Holds Fast on Options

Amid a torrent of criticism, FASB plowing ahead with rules for stock option expensing. Plus: plumbers needed at SEC.
Craig SchneiderMay 12, 2003

It’s likely going to take a lot more than a roundtable discussion of lawmakers, executives and accounting rulemakers, to reverse an interim decision that requires companies to treat stock options as an expense.

Certainly, the Financial Accounting Standards Board showed no signs of making a regulatory U-turn last Wednesday when it continued deliberations on stock-based compensation. This time, FASB addressed the specific area of attribution for stock options. The board, which already decided that companies should value stock options at the grant date, agreed to allow employers to adjust stock option expenses for estimated forfeitures.

Sheryl Thompson, a FASB spokeswoman, says the decision (which allows companies to book a lower stock options expense based on estimates of employee turnover) is consistent with what the FASB previously stated in Statement 123. “If an employee is leaving prior to vesting or performance targets are not met if the options are conditional, you would reverse out the expense at the vesting date, in essence because your cost is zero,” she explains. “At vesting, you provide any truing up that needs to be made, plus or minus.”

Meanwhile, FASB came under fire again last week at a Washington, D.C. roundtable, “Preserving Partnership Capitalism Through Stock Options for America’s Workforce.” At the meeting, lawmakers and executives protested the board’s decision to require companies to expense stock options, citing the often-heard complaints about deficient valuation methods and likely cuts to broad-based stock option plans, among other issues.

Consider the comments of Michael Enzi (R-Wyoming), the lawmaker responsible for putting together the “brain trust” of business leaders at the meeting: “My colleagues are concerned that FASB has jumped from ‘whether to expense’ to ‘how to expense’,” he said, according to a Financial Times account of the event. “I am disappointed in the appearance that everything has been decided already.”

Enzi didn’t help his case, however, when he later issued a press release that referred to FASB as the “Federal Accounting Standards Board.” Enzi, an accountant, chairs the Senate Banking Subcommittee on Securities.

In last week’s RegWatch column, Michael Crooch, a FASB board member, noted that the stock options project is still in the early stages of deliberations. FASB Chairman Robert Herz reiterated that point at the roundtable: “I have strong views personally, but we are a seven member board and have just started the process,” Herz noted, according to the FT story. “You never know [what we will decide] until we go through every step.”

Deliberations over stock-based compensation are scheduled to continue on June 4. FASB has been reexamining accounting for stock options in the wake of several high profile accounting scandals where corporations used stock options to avoid paying U.S. taxes while overstating earnings. The board is also looking to provide new rules that converge with international accounting standards. FASB will also address the general disenchantment with today’s employee stock option valuation methods (likely in late June/early July, according to Thompson).

Dellicious Cash Bonuses

Cash is still king, and managers at Dell Computer know it. The company reportedly has plans to swap out the stock option compensation packages for some of its senior executives. Reportedly, Dell plans to replace the equity payoffs with cash bonuses, which will be based on the company’s ability to hit profit targets.

As CFO.com already reported, Dell has already announced plans to slash its issuance of stock options for its employees by about half. That move came on the heels of FASB’s decision to have companies expense option grants.

But the computer maker’s move to provide cash incentives to executives appears to fly in the face of what many experts have predicted would be a trend towards more restricted stock grants. (Apple Computer reportedly issued 5 million restricted shares to CEO Steve Jobs in exchange for 27.5 million in underwater options.)

Nevertheless, Dell’s board of directors approved the cash bonuses last month, citing the plan as an executive-retention move, according to a recent Associated Press report of the company’s regulatory filing. It will ask shareholders to give their approval to the plan at its July 18 meeting.

The bonuses would be contingent on hitting targets for net income before extraordinary items, AP reports. The board’s compensation committee would pick eligible executives each year and set the terms and conditions for payment of bonuses. According to the filing, the bonuses cannot exceed 0.5 percent of the company’s consolidated net income — the same limit on current bonuses.

In some cases, executives could receive $6.9 million in cash three years from now. That’s four times more than the estimated present value of current stock-option grants, compensation consultant Brian Foley told The Wall Street Journal. CEO Michael Dell and COO Kevin Rollins are reportedly not included in the cash bonus pool.

SEC Chairman Donaldson Criticizes Bankruptcy Bill

The $1.4 billion settlement reached with ten investment banking firms over biased research apparently did not resolve all areas of conflicts-of-interest on Wall Street.

Late last week, SEC Chairman William Donaldson criticized a measure before Congress that would allow an investment bank to advise a former corporate client during bankruptcy. “Personally, at a time like this, where investor confidence is as fragile as it is, I would want to proceed very cautiously before lifting any of the conflict of interest restrictions that we have,” Donaldson told the Senate Banking Committee, Reuters indicated.

Reportedly, Sen. Paul Sarbanes (D-Maryland) asked the SEC chairman about the bankruptcy measure, which passed in the U.S. House of Representatives in March, during a hearing last week on the $1.4 billion settlement. No date has been set in the Senate for taking up the bill.

The provision redefines a “disinterested person” in an overhaul of bankruptcy law. Donaldson, however, added that he could not rule out that some better definition might emerge in time to let former investment bankers bring their expertise to the bankruptcy process. “But right now, I think it personally would be a mistake to change,” he said, according to the wire service.

Sarbanes, who said the prohibition on former investment bankers acting as bankruptcy trustees dated back to 1938, thanked Donaldson and said: “I appreciate the attitude that is reflected in that response.”

Plumbers Needed at the SEC?

It was decidedly not busienss as usual at the SEC this week. Instead of delving into corporate accounting scandals and reeling in wayward executives, regulators were busy plugging internal leaks.

Published reports confirmed that in an internal E-mail, SEC Chairman Donaldson warned the agency’s 3,100 employees not to leak information about investigations. The new chairman also reportedly suggested that he might limit the number of SEC staffers who are granted behind-the-scenes access to sensitive information.

Reportedly, the scolding by Donaldson came on the heels of news reports that the SEC was considering charging former Wall Street analyst Holly Becker and her husband, Michael Zimmerman, with insider trading. According to Reuters, SEC attorneys have investigated whether Zimmerman used unpublished research written by Becker’s former firm, Lehman Brothers-research that she allegedly passed on to him-to buy stock.

Reuters reported that in the E-mail, Donaldson wrote: “The kind of leaks we have seen over the past few weeks are fundamentally unfair to the people and companies being investigated, but not yet charged.” He went on to assert that leaks damage the SEC’s effort to conduct effective investigations.

The SEC has a longstanding policy of not commenting on current investigations.

Donaldson’s spokeswoman, Anne Womack, told Reuters that an announcement of a probe does not necessarily mean someone has done something wrong.

On the Calendar

Wed., May 14:FASB Open Meeting
Skinny: FASB is scheduled to address financial performance reporting by a business enterprise. The board will specifically discuss alternative definitions for the financing category on the statement of comprehensive income. The project is intended, according to the FASB website, (1) to improve the quality of information displayed in financial statements so that investors, creditors, and others can better evaluate an enterprise’s financial performance and (2) to ascertain that sufficient information is contained in the financial statements to permit calculation of key financial measures used by investors and creditors.

May 14 – 15: The SEC Hedge Fund Roundtable
Skinny: This event is part of the SEC’s formal fact-finding investigation into the hedge fund industry. The commission is considering whether to establish rules for the industry, which is largely unregulated. Most hedge funds and their advisers are able to avoid registering with the SEC or disclosing their holdings because of exemptions in the securities laws. Topics include (1) the structure and operation of hedge funds; (2) marketing issues; (3) investor protection issues; (4) trading strategies and market participation of hedge funds; and (5) an assessment of the current regulatory scheme relating to hedge funds. The roundtable discussions will be webcast live and can be accessed at the SEC website, http://www.sec.gov.