csua.org/u/6u5 -> www.washingtonpost.com/wp-dyn/articles/A56322-2004Apr6.html
Page A30 LAWMAKERS CONSIDERING whether companies should be required to report the value of employee stock options as expenses on their corporate balance sheets might want to take a look at a new report on the topic from their own budget office. The Financial Accounting Standards Board, the private body that writes rules for the accounting industry, has just proposed a rule - more than a decade in the making - that would require companies to show the fair market value of options as expenses. Anti-expensing forces, led by high-tech firms that rely heavily on options to attract employees, are pressing a measure in Congress that would block the FASB rule from taking effect. The Congressional Budget Office analysis of the issue is therefore timely - and just as important, its written in language understandable to those without advanced accounting degrees.
The CBO concludes, If firms do not recognize as an expense the fair value of employee stock options, measured when the options are granted, the firms reported net income will be overstated. Under the current rule, firms report the fair market value of their options, but they can tuck the number in the notes appended to their financial statements and not count it against profits. If options were treated like other compensation costs, the CBO notes, analysts and investors would be able to more easily assess a companys compensation practices and how those affect its profits;
The study discounts the argument by opponents of mandatory expensing that requiring such treatment would drive down stock prices and make it harder for companies to raise capital. While the impact on stock prices remains an unsettled question, the CBO says, firms stock prices are unlikely to experience a uniform adverse impact. And in any event, experience has also shown that it is unnecessary for firms to overstate their net income in order to raise capital. Venture capitalists and other lenders to start-up firms that rely heavily on options will be able to look past the stock options expense to see the firms potential. Opponents of mandatory expensing argue that theres no accurate way to place a value on options;
In short, it says, Although complicated to calculate, the fair value of employee stock options may be estimated as reliably as many other expenses. Those fighting the new rule dismiss the CBO report, saying the nonpartisan budget office isnt known for its accounting expertise. But the accounting experts - at the FASB and at its international counterpart, as well as the leading accounting firms - support expensing. Opponents of expensing also claim that Congress must act because the green-eyeshade types arent taking into account the devastating effect they say expensing will have on the economy;
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