Showdown over expensing options comes to House floor
AP Business Writer
WASHINGTON (AP) – A showdown pitting donor-rich Silicon Valley against key regulators and big investors shifted to the House floor Tuesday as the chamber prepared to block a proposed requirement that companies deduct from their profits the cost of stock options.
Stock-options legislation has sliced through House committees and across party lines in recent months, propelled by lobbying by deep-pocketed high-tech companies eager to curry favor with friendly lawmakers in an election year. It is aimed at a proposal by the rule-setting board for accounting to force publicly traded companies to record as an expense all forms of share-based payments to employees, including stock options.
In House debate, supporters of the legislation insisted that a mandate to count options against the bottom line would muddy income statements, discourage startup companies and hurt the economy by stifling future innovation.
“It would have a negative, real-world policy impact” and “choke off job growth,” said Rep. Pete Sessions, R-Texas.
The change proposed in March by the Financial Accounting Standards Board answered the post-scandals call for accurate corporate income statements. It could dramatically reduce the earnings of many big companies, particularly in the high-tech industry where stock options have been wildly popular.
The House was voting on the bill to override the FASB move. The bill is backed by House leaders of both parties – a rare occurrence in recent months marked by bitter rivalry- and the majority of lawmakers. Similar legislation has stalled in the Senate, however.
The bill, sponsored by Reps. Richard Baker, R-La., and Anna Eshoo, D-Calif., would limit required expensing of options to those owned by the top five executives in a corporation. It also would allow newly public companies to delay expensing for top executives in the first three years.
Companies now don’t have to record the cost of options as an expense on their financial statements, though hundreds have begun to do so voluntarily. Instead, they only must include the potential cost in a footnote, making it difficult for investors to gauge their effect on earnings.
Not requiring options to be expensed “runs the grave risk of inflating a company’s profits and misleading investors,” warned Rep. Alcee Hastings, D-Fla.
Across the aisle, Rep. Cliff Stearns, a Florida Republican who heads a subcommittee dealing with financial issues, chided bill supporters for disregarding advice from “the most famous investor in the country” – Warren Buffett.
Stock options are blamed by some for fueling corporate abuses in recent years by enticing executives to manipulate earnings to pump up the stock price and then sell their lucrative personal holdings. Still, options remain a popular compensation tool to help motivate employees. They can buy shares at a fixed price and sell at a profit if the company’s stock rises.
Among the proponents of mandatory expensing of options are Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson, Buffett and the Big Four accounting firms. Institutional Shareholder Services, a group that advises big investors such as pension funds and mutual funds, has been particularly vocal in urging the FASB proposal.
Arrayed opposite are members of a lobbying coalition that includes Agilent Technologies, Cisco Systems, Coors Brewing, Dell, General Mills, Intel and Sun Microsystems. Also opposed to mandatory expensing are the Nasdaq Stock Market, home to numerous big high-tech companies; the National Association of Manufacturers; the U.S. Chamber of Commerce; and the Business Roundtable, which represents chief executives of the largest U.S. corporations.
If the FASB proposal is formally approved, it would be effective for the fiscal years beginning after Dec. 15.
FASB’s chairman, Robert Herz, said last month the panel may delay a final rule because Corporate America already is straining against deadlines to implement other new regulations, enacted in 2002 in response to the scandals.
Donald Nicolaisen, the SEC’s chief accountant, has said FASB should consider delaying the rule to 2006.
The bill is H.R. 3574.
On the Net:
Financial Accounting Standards Board: http://www.fasb.org