Here is some historical perspective regarding this issue that from a Wall Street Journal article. It seems that “accountants” have decided moe than once that stock options should be accounted for as a charge against net income, but have failed to get the recommendation implemented.
Note: I am giving you two links, one to the actual WSJ article and another link to the Gorilla thread where the article is reposted in its entirety.
online.wsj.com
Message 17249383
According to the Wall Street Journal article: snips Accounting-rule writers grappled with the issue at least as far back as 1972. Not only weren't stock options widely used back then, but the challenge of calculating their cost was daunting. So officials decided that options needn't be treated as an expense.
During the 1980s, however, stock options became increasingly popular, particularly in Silicon Valley, where high-tech start-ups often offered them not just to executives, but to employees of all ranks. In the early 1980s, the nation's major accounting firms told the Financial Accounting Standards Board that they thought stock options were clearly a form of compensation, and thus should be accounted for as an expense.
By the early 1990s, there were sophisticated new methods available for projecting the long-term value of stock-option grants. Companies were beginning to use a mathematical model developed by economists Fischer Black and Myron Scholes to tell employees how much their stock options were worth. Mr. Scholes later won a Nobel Prize in economics for the model. The FASB reasoned that if companies could estimate the long-term value of the options to their employees, they could also give shareholders an accounting of the long-term costs of those options.
And so, the FASB voted in April 1993 to require companies to treat options as an expense, based on the estimated future value of those options. The vote produced a political tsunami that started in Silicon Valley, gathered force in Washington, and slammed into Norwalk, Conn., where the accounting board is based.
In 1994, thousands of high-tech workers gathered in Northern California for a raucous pro-options demonstration called the "Rally in the Valley," sporting T-shirts and placards with such slogans as "Stop FASB!" and "Federal Accounting Stops Business." The new accounting rule would "destroy the high-tech industry," warned the head of the American Electronics Association. The high-tech sector circulated studies predicting that corporate profits would fall by 50% and that capital would dry up as a result of the new rule. More than 100 high-tech executives flew to Washington to work Capitol Hill.
The Clinton administration weighed in against the FASB. So did institutional-investor groups, who said the rule change would muddy financial statements. A nonbinding resolution opposing the FASB rule change passed the Senate by a vote of 88-9. Its sponsor, Sen. Joseph Lieberman, a Connecticut Democrat, later proposed legislation that would have, in effect, put the FASB out of business. The Business Roundtable, a group made up of major corporate leaders, threatened to refuse to adhere to FASB decisions.
By the end of 1994, the FASB withdrew the rule, deciding instead that companies would have to disclose the value of their options only in a footnote in their annual reports. At the time, Silicon Valley was starting to power the strongest U.S. economy in a generation and a bull market in stocks, and nobody was in the mood to tinker with success.
By the end of the 1990s, however, some policy makers began to worry about the unchecked explosion of stock options. Mr. Greenspan said that the failure to expense options was artificially inflating profits and stock prices. "This distortion ... has overstated growth of reported profits," he said in 1999.
Since then, Mr. Greenspan's criticism of options accounting has grown increasingly blunt. Between 1995 and 2000, S&P 500 companies averaged a heady annual earnings growth rate of 12%. Internal Fed research concluded that, if those companies had expensed their stock options, as Mr. Greenspan now advocates, their average earnings growth would have been reduced to 9.4%. In 2000 alone, Fed researchers concluded, operating income would have been 13.8% below that which the companies actually reported.
Mr. Greenspan doesn't have direct oversight of accounting standards, but he does sit on a committee that advises President Bush on post-Enron reforms. And his views on almost any issue shape debates in Washington.
The Fed Chairman used that clout in telling Congress earlier this month that stock-option expensing was his top post-Enron reform priority. "I do not deny that earnings would be lower if you expensed them," he said. "I do not deny that there may be greater difficulty in attracting capital ... ," he added. But he suggested that the extra capital many companies attracted with earnings reports that failed to reflect the cost of stock options was probably money they didn't deserve anyway.
Meanwhile, a campaign for common global accounting standards has been gathering steam. Last September, the newly formed International Accounting Standards Board unveiled one of its first initiatives: It would consider requiring companies around the world -- including in the U.S. -- to treat stock options as an expense. "The use of options has gotten to the point where it is abused as much as used correctly," former Fed Chairman Paul Volcker, a leader of the London-based board, told Congress recently. Mr. Volcker is currently leading an effort to overhaul Arthur Andersen, the big accounting firm that audited Enron's books and is fighting an indictment on charges that it destroyed documents in connection with the Enron matter.
Best, Huey |
