Magazine article Strategic Finance

Stock Option Accounting as a Political Bellwether. (Trends in Financial Management)

Magazine article Strategic Finance

Stock Option Accounting as a Political Bellwether. (Trends in Financial Management)

Article excerpt

* THE DELUGE OF Companies now volunteering to expense the cost of employee stock options shows how the power of public opinion and politics alone--without regulation--com influence corporate behavior.

As late as mid-July 2002, only two companies among the S&P 500, Boeing and Winn-Dixie Stores, expensed the cost of stock options. By mid-September 2002, more than 90 firms overall said they would, according to Standard & Poor's. (For a complete list of the companies and the pro forma impact of options compensation on 2001 earnings per share (EPS), see S&P's spreadsheet at www.spglobal.com/optlist.xls.)

This turnabout contrasts markedly with prior rhetoric, lobbying, and financial disclosure practices and comes without any new regulation. In fact, the new corporate regulation legislation President Bush signed into law July 30, 2002, the Sarbances-Oxley Act, conspicuously omits stock option accounting regulation. Instead, lawmakers deferred it to the Securities & Exchange Commission (SEC) and Financial Accounting Standards Board (FASB).

During the prior economic and political era, the FASB sought time and again to change GAAP so companies would have to account for stock options as employee compensation expense--only to be stymied politically and subverted through accounting loopholes (see the special section on stock options in this issue of Strategic Finance and April 2002, "The Stock Options Accounting Subterfuge," by C. Terry Grant and Conrad S. Ciccotello). The result was a "liberal" Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," SFAS No. 123--which took effect in January 1996--recommends but doesn't require companies to charge the fair value of options as a compensation expense to operating income. And, as noted, few companies do--that is, until the proverbial winds changed this year, prompting the voluntary conversion last summer.

Now the issue these firms face is not whether to book options costs as an expense, but how.

The FASB--still not forcing companies to expense the cost of stock options--drafted proposed guidelines in August 2002 that give companies that choose to expense stock options three alternatives:

* The current "clean slate" method, which allows companies to expense options granted since the beginning of the fiscal year in which they decide to begin expensing options. …

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