Speaking of accounting for stock options......
International Accounting Board
Plans to Treat Options as Costs
By SILVIA ASCARELLI, PHILLIP DAY and CASSELL BRYAN-LOW
Staff Reporters of THE WALL STREET JOURNAL
Updated November 7, 2002
LONDON -- The International Accounting Standards Board will lay out Thursday its controversial proposal to force many companies to treat stock options as an expense, a move that is likely to curb their popularity as a form of compensation.
The proposal, which would take effect in 2004, is expected to be contested particularly fiercely in the U.S., where the use of stock options in pay packages has been most extensive. Were such rules already in effect there, the earnings of companies in the Standard & Poor's 500 index would have been reduced by 23% last year, according to one estimate.
Although these new rules, if adopted, would apply only to companies following international accounting standards, or IAS, the U.S. accounting rule-setter, the Financial Accounting Standards Board, will seek its own reaction to the international rules later this month. That could be the first step toward creating similar rules for U.S. companies.
In Europe, the European Union has retained the right to endorse individual rules as part of a decision to require almost all publicly traded companies to adopt IAS by 2005. In the past, the European Commission has fretted that any rules that didn't also apply to U.S. companies could put European firms at a competitive disadvantage.
In the U.K., the Association of British Insurers, which represents major institutional investors and backs the rules in principle, said it might have to reconsider its position if the U.S. didn't go along.
"We have no intention of listening to that," said David Tweedie, the chairman of the IASB, which was created nearly two years ago to come up with international accounting rules. "If the political flak starts flying -- and it might -- what would we do about it? The answer is nothing. If we think it's the right answer, we're not going to change it."
Dresdner Kleinwort Wasserstein recently estimated that the overall impact on European earnings of treating share options as an expense would be one-third that of the impact on U.S. earnings. While earnings of U.S. technology companies would have plunged by 75% under such rules last year, those of European tech companies would have fallen by closer to 20%.
Use of share options among listed continental European companies has been growing rapidly in recent years, said Damian Carnell, a principal at consultancy Towers Perrin. While they have become particularly popular among French companies, in part for tax reasons, Spanish, Italian and Swedish companies are rapidly catching up.
One benefit of the new rules could be that option-laden executive-pay packages become easier for outsiders to assess, said Peter Montagnon, head of the Association of British Insurers' investment-affairs unit. "That will take some of the heat out" of the pay debate, he added. "The fact that you have to value the package will also mean there is some deterrent to making them very complicated."
Nonetheless, the new rules are likely to make share options less popular, said Paul Randall, head of employee benefits and incentives at the London law office of Ashurst Morris Crisp. "It's bound to cause [European companies] to shy away from them to quite a significant extent." He predicted the new rules, combined with differences in the way shares and share options are taxed in the U.K., could mean a 50% drop in their use among U.K. companies.
The share-options standard is the first of several controversial areas that the IASB is likely to tackle. Its next hot-button issue -- accounting rules for company pensions -- is expected to hit European companies particularly hard. Sir David, who was granted his knighthood after pushing through wholesale changes to U.K. accounting rules in the 1990s, is expected to seek rules that are even tougher than the U.K. accounting rules he helped create and which are now showing that many pension plans are in deficit.
As expected, the proposed rules would require companies to value share options at the moment they are granted, rather than at a later period, and to treat them like any other business expense. In the past, companies haven't had to directly expense options, although companies following U.S. accounting rules have had to disclose a value in the footnotes of their financial results, leaving the bottom line unaffected. The proposed IAS rules don't give companies the option of disclosing the information that way.
Companies and others have until March 7th to comment on the proposed rules. Objections are likely to center on the way the IASB wants companies to measure the value of those options. It won't allow them to unwind the cost of the options if they turn out to be worthless or if the employee leaves before the options are vested. Instead, it says companies should make adjustments to the pricing model they use to calculate the cost, and it gives some guidance on how it thinks they should do it. In some cases, it contrasts its proposal with U.S. rules and asks for opinions on which approach is better.
Should the U.S. eventually go along with new rules on share options, it would underscore a remarkable shift during the past year. U.S. companies, which had lobbied Congress in the mid-1990s to block an attempt to treat options as an expense, had been arguing that the IASB should just fall in line with U.S. rules. But after the collapse of Enron Corp., at least 110 companies, including some IASB critics, did an about-face and said they would begin treating options as an expense. Federal Reserve Chairman Alan Greenspan has also begun arguing that not treating options as an expense gives a false impression of a company's profitability.
Still, many companies are resisting the move, arguing that stock options don't constitute an expense, and that they are crucial to a company's ability to hire and retain talent. "For semiconductor makers, any move that would potentially harm our ability to grant options would severely harm our competitive position," said the Semiconductor Industry Association in a comment letter to U.S. rule makers. Such companies are lobbying instead for more detailed disclosure of information about stock-option plans as a compromise.
Other standard-setters are lining up behind the IASB. Those in the U.K., Australia and New Zealand will publish the IASB's proposed rules Thursday as proposed national rules. Germany already has a similar proposal, and Canada, whose rules are similar to the U.S., is considering no longer giving companies the option of merely including the value of share options in footnotes.
In Asia, the rules would have a particular impact in Hong Kong, the Philippines, and Singapore, which are moving their accounting practices in line with international rules. They would also affect Australia, which has said it will adopt IAS by 2005.
Singapore is now overhauling its accounting standards and plans on keeping its new rules as close as possible to those set out by the IASB. However, the government has said it will study the treatment of options in other jurisdictions before deciding how they should be treated in the island-state.
Write to Silvia Ascarelli at silvia.ascarelli@wsj.com, Phillip Day at phillip.day@wsj.com and Cassell Bryan-Low at cassell.bryan-low@wsj.com.
Updated November 7, 2002 |
