Options alternate offered by 3 firms
By Mark Schwanhausser and Jim Puzzanghera
Mercury News
Posted on Wed, Sep. 15, 2004
The technology industry has launched yet another effort to stop accounting rule-makers from enacting requirements to count stock options as a corporate expense that would lower profits.
This time, three technology industry heavyweights -- Cisco Systems, Genentech and Qualcomm -- will present accounting rule-makers today with an alternative method for valuing stock options that would slash the amount subtracted from corporate profits by about 70 percent.
Proponents say that the method -- introduced into the debate just three months before new accounting rules are scheduled to take effect -- would be more accurate than methods the Financial Accounting Standards Board plans to use. They also claim their method would make it easier for companies to calculate, for auditors to verify, and for investors to tweak on their own.
But skeptics said the proposed method would lowball the actual corporate cost of doling out stock options, resulting in overstated profits.
Current rules allow companies to choose whether to subtract options costs from their profits or to report the cost in footnotes in their public reports to regulators. The accounting board's looming rules would require companies to count the option costs as a corporate expense subtracted from the bottom line starting Dec. 15.
Volatility affected
Lobbyists who unveiled the new ``Fair Value Index-Adjusted Method'' Tuesday said the three companies didn't disclose how the model would alter their reported earnings. But they generalized that the method would slash the accounting hit to their profits by roughly 70 percent because it uses a lower estimate for the so-called ``volatility'' in the value of the company's stock.
If that measure were applied to Cisco's 2003 earnings, options would have erased $378 million in profits -- instead of the $1.3 billion that would be subtracted under the conventional valuation method. Qualcomm's hit would have been $78 million, not $260 million. And Genentech's profits would have dropped $52 million, not $172 million.
``It doesn't seem to pass the smell test,'' said Dane Mott, an analyst for Bear Stearns. ``All models have their certain flaws. They haven't convinced me that their model solves the flaws.''
Lobbyists appeared to be braced for a similar reaction when the accounting board meets today with finance executives from the three California technology companies during an informational board meeting in Norwalk, Conn.
``I would not be surprised if some board members cavalierly dismissed this with the accusation that, `Oh, you're just trying to get to a lower number,' '' said Jeff Peck of the International Employee Stock Options Coalition.
The industry is also pushing a Senate bill that would require companies to subtract only the cost of options granted to the top five executives -- a fraction of the overall options given to employees at most companies. That bill also would set a company's stock-value volatility at zero, minimizing the deduction from profits.
House OK'd bill
The House overwhelmingly passed the bill 312-11 in July. But Senate Banking Committee Chairman Richard Shelby, R-Ala., and other powerful senators have pledged to block it from coming to a vote.
With the Senate facing a legislative plate brimming with unfinished budget bills before it is scheduled to adjourn by Oct. 8, it will be difficult to push through the options bill, said John Palafoutas, lobbyist for the technology industry group known as the AeA, formerly known as the American Electronics Association.
Instead, the industry may opt to push for a delay of up to three years in the implementation of the new rules.
siliconvalley.com
--------------------------------------------------------------------------------
Contact Mark Schwanhausser at mschwanhausser @mercurynews.com or (408) 920-5543. Contact Washington Bureau Chief Jim Puzzanghera at jpuzzanghera @krwashington.com or (202) 383-6043. |
