And this also:
Stock Option Accounting
TechNet opposes S.1940 (McCain/Levin) - legislation intended to reverse the current stock option accounting standards by limiting tax deductions from stock options to the amount a company includes as an expense on financial statements.
Current accounting standards for stock options requires transparency and extensive disclosure of precise and objective information in financial reports. FAS 123, the current stock option rule, was hotly debated and fully vetted. The final result was a rule that permitted, but did not require, stock options to be expensed. If the non-expensing approach is selected, extensive disclosure relating to the options must be made in the footnotes to the financial statements.
Building upon this disclosure approach, the SEC announced in December that additional disclosure to investors of stock options plans -- an initiative begun by former Chairman Arthur Levitt -- would now be required. This announcement was widely hailed by shareholder advocates and investor groups. This recent and significant development at the SEC enhances the transparency of the potential cost of stock options plans to shareholders.
In contrast, stock option expensing - the goal of the McCain/Levin legislation - would skew financial statements by introducing a misleading and unreliable expense number into financial statements. An expense approach would be misleading to investors. Because options cannot be measured accurately, an expense will lead, by definition, to inaccurate financial statements.
First, the “cost” of granting stock options is not an out-of-pocket cost. Instead, any “cost” is limited to the potential dilution that the existing shareholders would bear if and when the options were exercised. Second, existing option pricing models (such as Black-Scholes) simply are incapable of “valuing” employee stock options – these models were designed to value freely-tradable options. Employee stock options are not freely tradable and are generally not vested until years after they are granted.
By limiting the tax deductions for stock options, the bill amounts to a corporate tax increase. A company's tax deduction would be limited to the amount of stock option expense reported on its financial statements. This would generally be less than the current tax deduction allowed under the Tax Code. A tax increase would hurt small, medium and large-sized businesses and could dampen job growth in an already difficult economic climate. The bill would also discourage R&D, because the R&D tax credit would be reduced for companies that do not expense stock options and complicated by the fact that companies would have to compute the amount of options included in the credit computation on an employee-by-employee, option-by-option basis.
The stock option accounting standards are not at issue in the Enron fraud. There is no circumstance where employee stock options would require a reduction in a company’s assets, an increase in its debt or a decrease in shareholders’ equity. In addition, accounting for stock options is entirely irrelevant to the 401(k) plan matter that has arisen in the Enron environment. Corporate policies relating to how much company stock in which employees can invest in their 401(k) plan are unrelated to accounting for stock options. The two issues are totally separate -- and stock option plans are completely unrelated to 401(k) retirement plans.
Stock options are currently broadly based, awarded to employees at all levels of companies across the American economy. Requiring options expensing will severely limit the ability of companies to recruit and retain talented employees at all levels, impacting innovation and growth in the American economy.
TechNet urges Congress to oppose S.1940 - legislation that will do significant harm to the technology industries and investors, without addressing the real issues of the Enron collapse. |
