Stock options expensing long overdue
globeandmail.com
"There is still substantial opposition in both Canada and the United States
to the idea, however, particularly from technology companies whose balance
sheets are already weak. Companies such as Cisco Systems
and Dell Computer -- heavy users of options -- would have had their profits
slashed if they had expensed them, while others such as Nortel Networks
would have seen losses multiply"
By MATHEW INGRAM
Tuesday, October 22, 2002 - Page B2
The news that Canada's accounting regulator plans to force companies to treat
stock options as an expense -- a move that would make our rules more strict than those in the United
States -- comes as a nice surprise, given our usual propensity for waiting until our neighbour to the south
does something before we jump on the bandwagon. Now all we have to do is ensure the new rules actually
make it from the drawing board to the books.
Last week, the Accounting Standards Board approved a new rule for options that would require companies
to record them as an expense if they want to meet generally accepted accounting principles (GAAP). Under
current rules, companies can either treat options as an expense up front or insert a footnote showing the
effect of doing so.
Until recently, most firms in Canada and the United States chose to go with a footnote, one that usually
showed up near the end of a 30-page annual report. As of last year, no large Canadian companies treated
options as an expense, and only two members of the Standard & Poor's 500-stock index did -- Boeing and
Winn-Dixie Stores. Then, suddenly, the debate over options jumped from the back burner of accounting
trivia to the open flame of the investment world, thanks to a storm of bad publicity about accounting
irregularities at companies such as Enron and WorldCom. But the issue has been around for almost a
decade -- and each time it comes up, companies have done their best to fight any tightening of the rules.
That resistance has wavered recently, as some companies have voluntarily adopted a tougher standard --
driven in part, no doubt, by the need to appear as pristine as possible to investors. Earlier this year,
Toronto-Dominion Bank started the trend toward expensing options in Canada and, since then, dozens of
companies have done so.
There is still substantial opposition in both Canada and the United States to the idea, however,
particularly from technology companies whose balance sheets are already weak. Companies such as Cisco
Systems and Dell Computer -- heavy users of options -- would have had their profits slashed if they had
expensed them, while others such as Nortel Networks would have seen losses multiply. The first time the
issue came up, when the U.S. Financial Accounting Standards Board proposed a change in 1994,
technology companies played a key role in putting pressure on the agency to modify its original standard --
effectively the same rule that Canada's regulatory body says it will implement. Eventually, the FASB
relented and gave companies a choice.
That decision is now widely viewed as a critical error, one that helped foster the options craze, a craze that
in turn provided fuel for the technology market bubble. Critics feel the desire to improve an option payoff
may have been part of the impetus for some of the multibillion-dollar deals in the tech sector -- the same
ones now being written off by firms as they flirt with bankruptcy.
The ASB's proposed rule change comes as the accounting world tries to deal with the issues raised by the
tech bubble and the alleged frauds at Enron and WorldCom. Both Canada and the United States have been
working with the International Accounting Standards Board, where chairman Sir David Tweedie has been
a vocal critic of the current either/or choice. With its proposal, Canada's ASB has shown it wants to get out
in front of the wave, while the United States says it will wait to see what the IASB does.
The ASB's rule change could still run aground, of course, since it is just a proposal -- one that will be
released later this year and be open for comment. The agency also has to deal with the issue of how to
value options, which involves financial arcana such as the Black-Scholes model. The Canadian body insists
the proposed change will go ahead, but then the FASB said much the same thing about its rule in 1994.
At the same time, however, the tech sector has lost a lot of its previous power and influence, while full
accounting disclosure has taken on a new urgency -- a combination that might make it more likely both
U.S. and Canadian regulators will follow through on long-overdue changes to option rules. Companies can
still put non-GAAP numbers in press releases, but let's hope investors know better by now. |
