FASB Proposal on Stock Options

The concept of expensing stock options as it is being proposed by the Financial Accounting Standards Board (FASB) is completely unacceptable; a careless suggestion of additional confusing accounting requirements and detrimental focus on grossly inaccurate & misleading company reporting. The International Employee Stock Options Coalition is a good source of ongoing intel on the subject.

Jeff Nolan and Ed Sim both have good pieces on the matter, which I strongly agree with.

CFO Magazine also provides an insightful commentary in to a House bill that bill would require the SEC to complete an economic impact study before FASB is permitted to implement its proposed rule. The bill would also require companies to expense only stock options granted to the CEO and the next four highest-paid officers. Small businesses would be entirely exempt from FASB's rule; newly public companies could forgo expensing for three years.

Though this bill has the right idea in mind, the overall FASB proposal still complicates matters too much. I strongly believe that supporting the rights of shareholders and addressing the effects of compensation on a company's earnings is a significant task that is absolutely essential.

I do, however, also believe that simplicity is golden. The additional reporting requirements necessary under this new proposal will only create confusion for both the reporting company and the eventual investor. This is fact.

I do also believe that using an approximate (at best) Black-Scholes or binomial valuation methodology in any sort of public report will also create confusion (for both the reporting company and the eventual investor). How can you possibly accurately price something that is neither fully vested or freely tradable? Revenues and sales are fact, operating expenses are fact, unvested and volatile stock options are black magic. The Income Statement is not the place to be playing with a variable tied to the company's equity. Excel would scream a circular reference error. This is not simplicity for the average (or even sophisticated) investor.

Ultimately, we do not need more financial reporting artistry on the street, we need reports that reflect the actual operating performance of a company. And, I am absolutely certain that this proposal will not help me better understand how a company is really doing.

Disclosing the potential liability posed by stock options is arguably a necessary change to our system, but that's what a balance sheet or set management statements is for.

Please take the time to get involved in this issue and email FASB while the public comment period is still open, which is through June 30, 2004. According to Jeff, you can direct an email to director@fasb.org with a cc to jcdowling@nvca.org. If you have specific questions about the proposal, Michael Tovey is the project director for this at FASB and his email is mtwovey@fasb.org (your email should reference file # 1102-100).