Battle heats up over stock-option rules

Posted: Friday, September 24, 2004

NEW YORK (AP) No one ever expected those opposed to expensing stock options to just accept new accounting rules without a fight. But the battle they are waging is starting to look desperate and maybe even a little dirty.

Technology companies and their political supporters have long been against the idea of deducting option costs from earnings, given that such a requirement would be very dilutive to their profits since they rely so heavily on options to compensate their employees.

Now that new regulations are expected by year-end, they are pulling out all the stops even trying to revive legislation that would largely block an expensing provision from taking effect.

Should their tactics work, they would have a widespread effect on companies across corporate America and their investors, too.

Options, which are a right to buy a stock at a fixed price, became a popular compensation tool during the 1990s. They are intended as a performance incentive, with employees able to buy shares and resell them at a profit if the company's stock rises.

To date, companies don't have to record the cost of options as an expense on their income statements. Instead, they just must record the potential cost in a footnote.

But in the wake of all the business scandals, there is big pressure on the Financial Accounting Standards Board, the U.S. accounting rulemaker, to change that by requiring better option accounting that will help investors more easily gauge the effect of options on earnings.

The FASB tried to push through a similar measure a decade ago, but it eventually backed down to pressure from Congress and the tech industry. Now the question is whether the FASB which issued a draft of the new rules last spring and is expected to come out with a final standard by year-end will buckle again.

The tech industry is doing its best to make that happen.

On one hand, tech firms appear to be trying to get the FASB to delay the release of its final rule. Last week, tech powerhouses Cisco Systems Inc., Genentech Inc. and Qualcomm Inc. presented to the FASB an alternative way to value stock options that would generally allow companies to report much lower expenses than the methods currently recommended by the FASB.

For instance, their plan would allow companies to estimate the volatility of their stock prices by using an index such as the Standard & Poor's 500, rather than calculating the volatility of an individual stock over time.

While accounting experts say that the chances of the FASB supporting that methodology are very slim, rulemakers agreed to review it a win for the tech industry.

Then there is the industry's press on Congress. To the delight of the tech lobby, the House of Representative overwhelmingly passed a bill in July that would essentially override any FASB action by requiring companies to only expense options for their five highest-paid executives rather than their entire work force.

That legislation is now stalled in the Senate, and nothing is expected to happen on it before the November presidential election. But that hasn't slowed the tech lobby's maneuvering in fact, there have been rumors swirling about the possibility of them pushing for a stock-options component being tagged on to an appropriations measure.

With that in mind, a bipartisan group of four senators Republicans Peter G. Fitzgerald of Illinois and John C. McCain of Arizona, and Democrats Carl S. Levin of Michigan and Richard J. Durbin of Illinois sent a letter to President Bush last week urging him to oppose any backdoor effort in the Senate to enact legislation on stock options.

The Securities and Exchange Commission has also been a vocal supporter of FASB. In fact, SEC Chairman William Donaldson wrote a letter to 16 senators last month in which he told them to let the FASB ''run its full course.''

Whether the tech lobby gets its way could have a big impact on how earnings look in the coming years. Sure, profits may be higher, but investors may not be getting more accurate pictures of companies' finances.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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