Who Rules Accounting?

Congress muscles in on FASB -- again.

Of course, that view assumes that investors’ perceptions are more important to economic growth than business fundamentals, and the bursting of the Internet bubble has thrown cold water on such thinking, at least for the time being. But that hasn’t prevented industry lobbyists from rehearsing the argument in the latest battle with FASB.

Yet Barry McCarthy, CFO of online DVD rental service Netflix, thinks such concerns are vastly overblown. “Our investors focus on EBITDA and free cash flow just as much as on net income and net loss in deciding what the enterprise is worth,” he says. “The conventional wisdom on Wall Street has been that investors look right through the stock-option charges for tech companies.”

According to Silicon Valley, however, they won’t if the charges are no longer buried in the footnotes. The question is, is that a good thing or a bad thing? —C.S.

The Same Old Story
The debate over accounting for stock options is 30 years old and counting.

Year Action
1972 The Accounting Principles Board (FASB’s predecessor) prescribes intrinsic-value method to measure cost of employee stock option plans.
1984 FASB reconsiders APB Opinion No. 25 (above) to determine whether all stock- based compensation should be included as an expense on income statements.
1988 FASB sets aside compensation project; receives hundreds of comment letters, many objecting to FASB’s tentative conclusions on stock options accounting.
1991 Sen. Carl Levin (D—Mich.) introduces bill that would have required companies to treat the value of stock options as an expense.
1992 FASB resumes work on the stock-based compensation project, partly in response to the proposed federal legislation.
1993 FASB issues exposure draft of proposed FAS 123, requiring that stock options be valued and recognized as expense in a company’s reported net income.

Sen. Joe Lieberman (D—Conn.) introduces bill that would have nullified the effect of the proposed FASB standard on stock options.

FASB gets over 700 comment letters, most expressing opposition to options ex- pensing. Senate subcommittee holds hearings on employee stock options accounting.

1994 FASB conducts public hearings in Connecticut and Silicon Valley on proposed standard on stock options; thousands of high-tech workers stage protest.

Senate votes 88—9 for nonbinding resolution urging FASB to drop expensing proposal. FASB decides to require only pro-forma disclosure of stock options.

1995 FASB issues FAS 123, recommending fair-value method, requiring pro-forma dis- closure of all stock-based compensation expense but not on-book recognition.
2001 IASB says it will consider requiring companies to expense options. Enron Corp. files for bankruptcy.
2002 Senator Levin introduces a bill to require companies to expense options before receiving tax deductions on them.

FASB invites public comment on comparison of FAS 123 and IASB proposed standard, which would treat options as an expense.

FASB issues amendment to FAS 123 to provide alternative methods of transition and additional disclosures for companies that voluntarily expense options.

2003 FASB adds project on stock-based compensation to its agenda to consider whether the cost of stock options should be treated as an expense.

Rep. David Dreier (R—Calif.) introduces bill that calls for more disclosure of stock- option plans but would impose a three-year moratorium on rules for stock options.

FASB votes 7—0 in favor of expensing employee stock options.

Senate holds roundtable discussion on accounting for stock-based compensation.

House subcommittee holds hearing on accounting for stock-based compensation.

Sources: FEI, FASB


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