'Encourage,' Not MandateOption Charge, Says FASB
The Financial Accounting Standards Board backs off its stock-option proposal -- which could have prompted a 40 percent hit for high-tech companies
The Financial Accounting Standards Board's Dec. 14 decision to back off a proposal requiring companies to charge employee stock option grants against earnings has prompted a sigh of relief in the high-technology industry.
FASB has decided to drop a proposal that would force companies to deduct the value of stock options from their income. They have elected instead to "encourage" companies to include the item as a charge.
For companies that elect not to report their stock options in this fashion, FASB will be content if they simply list the value as a footnote in annual reports.
"The problem with the choice is that they have not yet defined the method -- the equation -- that will determine what the fair values of stock options are," said Donna Gleason, the Electronic Industries Association's director of government relations.
According to survey results released by the American Electronics Association last month, the proposed rule would have reduced the earnings of the average advanced technology firm by as much as 39 percent.
Applied across the entire industry, the ramifications of the rule would have been measured in the billions of dollars.
And while industry is happy to see FASB retreating from the proposal, there are those who are concerned FASB's fallback position may be more of a tactical retreat than an outright defeat.
"FASB has been trying to figure out a way to calculate the value of stock options on the income statement for years," said Jon Englund, AEA's director of national affairs.
But reaching this figure, industry opponents contend, is difficult if not impossible to calculate accurately, and reporting these figures as a charge against earnings could distort the financial picture of a company enough to make the compensation mechanism unattractive.
"Either companies would take a huge hit to earnings, or the number of stock options awarded to company employees at all levels would be drastically reduced," Englund said.
If that had been the case, said Robert DeHaven, president of Vienna-based Quality Systems Inc., it is conceivable that companies like Microsoft or Oracle would have never been profitable.
For young high-technology companies with a future in the Washington D.C., area, he explained, granting stock options is the best way to attract and keep top talent. "That is how we compete with large Fortune 500 companies.
"Stock options were how I was able to feel that I had the best management team available."
Inasmuch as high-quality talent is vital to the launch of any successful high-tech venture, the proposed FASB rules would have raised barriers to raising capital as well.
"We would have been in dire straits because we counted on debt financing -- we were going to banks rather than venture capitalists. And anything that impacts the bottom line is just something that you have to explain. It would have made life a lot tougher for us," he said.
Jim Kimsey, chairman of America Online, concurred.
"It particularly affects relatively new high-tech companies like ourselves more than, say, General Motors," he said.
"We have a policy of giving virtually all of our employees stock-options because we want all the folks that work here to have a vested ownership interest in the company."
An analysis conducted by American Online's chief financial officer indicated the FASB initiative would have cost the company millions of dollars, and would have definitely "inhibited our ability to issue stock options," he said.
While some FASB members concede they lacked the political wherewithal to get its new accounting standard through, they do not believe they have lost on the merits of the issue.
"If you grant a stock option to somebody, you have given them something that has value," said Deborah Harrington, FASB's spokeswoman.
"We look at that as being compensation," she said, adding that like any other form of compensation, it should be viewed as such and be deducted from income.
But political realities being what they are, FASB has made the decision to back off, at least for the moment.
"We have listened to [the industry] say that this would be a terrible burden to them," she said. "What we have done is not our first choice, but it at least lets investors and other people be aware of the value of the options these companies are giving away without having to go through the income statement."
And for the time being, that is just fine with AOL's Kimsey.
"It is dead for now, and we are grateful for that. So we will put it behind us and get on with more productive activities."n