Cisco Systems Inc. is seeking approval from the Securities and Exchange Commission to sell a new derivative that could reduce the hit to earnings when it begins expensing the value of certain employee stock options.
Most public companies must begin expensing options as of their first fiscal year that begins after June 15; Cisco’s fiscal year kicks off on August 1.
“It’s no secret that we’re trying to get a more accurate valuation,” Cisco spokesman John Earnhardt told Bloomberg. “We have spent a lot of time on this issue and all we’re trying to do is keep the option of using employee stock options.” The company’s goal is to have the market do the pricing, in the belief that investors will assign a lower value to the options than the value derived from models such as Black-Scholes. (But Cisco’s idea, maintains deputy editor Ron Fink, sounds as if it depends on a poorly performing derivative instrument.)
Every company that awards options as well as every accounting firm will be closely watching how this issue plays out. “As long as it’s not done in a way that turns out to be a sham, then everybody that’s looking for good accounting should support this,” Grant Thornton chief executive officer Edward Nusbaum told the wire service.
Cisco is one of a number of tech companies that have led the opposition to stock-option expensing. The networking equipment company claims that its earnings will be pared by 20 percent, reported Bloomberg, as a result of Statement 123R, the Financial Accounting Standards Board’s revised rule on expensing options.
According to the wire service, chief financial officer Dennis Powell first proposed the derivative, developed by Morgan Stanley, in a presentation before the SEC in March. The commission’s chief accountant, Donald Nicolaisen, supports creating a market to value options; Nicolaisen and chief economist Chester S. Spatt are studying the new security, Bloomberg added.