Congress Tries End-Around on FASB Stock Options

By Barlas, Stephen | Strategic Finance, December 2004 | Go to article overview

Congress Tries End-Around on FASB Stock Options


Barlas, Stephen, Strategic Finance


ALTHOUGH CONGRESS WENT HOME for the year without passing legislation hamstringing the Financial Accounting Standards Board's ability to issue a rule on accounting for stock options, it may have slowed the Board down by prevailing on the Securities & Exchange Commission (SEC) to do some preparatory work. In its last days in session in 2004, the Senate declined to pass a bill (S. 1890) that the House had passed in the summer by a vote of 312-111. The bill would have forced the FASB to stop well short of what it is expected to require in the final proposal it issues this month. For example, the House and Senate bills require the expensing of stock options for only the top five executives of a company. The Senate failed to pass the "Anti-FASB" bill because of the refusal of Senate Banking, Housing, and Urban Affairs Committee Chairman Sen. Richard Shelby (R.-Ala.) to bring the bill up for a vote in his committee. In the weeks before adjournment, however, various senators beseeched SEC Chairman William Donaldson to use his FASB oversight authority to slow down the FASB's speeding options-accounting train. The senators were particularly concerned about the Board's decision to not require companies to use a specific valuation model to calculate stock options. Companies will be able to choose a stock option valuation model that is appropriate to each individual company. "We are extremely concerned that without additional field-testing of the various valuation models and implementation guidance from the SEC, U.S. companies will be subject to unending lawsuits if they choose the wrong' valuation model," wrote 35 Republican senators, who were backed by Senate Majority Leader Bill Frist (R.-Tenn.), who wrote his own letter, and the chairman of the Senate Appropriations Committee, Sen. Ted Stevens (R.-Alaska), who has the power to play havoc with the budget of any federal agency. "While many studies have found that current valuation models are highly inaccurate for large companies' stock option grants, the lack of accuracy is an even greater concern for entrepreneurial and start-up companies. Virtually no research has been conducted regarding the accuracy of valuation models to be used by small companies."

The FASB did make a concession the week after Congress left town by extending the effective date of the new rule six months to June 15, 2005. But the FASB still expects to publish the rule this month, and it reiterated the validity of its valuation methods.

Reporting Executive Compensation

While the SEC hasn't signaled whether it intends to get involved in stock options valuation evaluation, Alan Beller, head of the SEC's Division of Corporation Finance, told a conference of the National Association of Stock Plan Professionals (NASPP), the Corporate Counsel, and the Corporate Executive in October that the agency is looking very closely at how companies report executive compensation and may propose an updating of its 10-year-old regulations on the subject. …

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