Fasten Seat Belts: Bumpy Ride For Stock Option Accounting
We are about to embark on another round of potent political opposition against the seemingly mundane process of accounting standards. Stock options accounting is about to be revisited by the new International Accounting Standards Board (IASB), the body created to establish global accounting rules.
The IASB is without a full appreciation of the 1994 political firestorm that resulted in the United States when the Financial Accounting Standards Board proposed its Exposure Draft 127-C, "Accounting for Stock-Based Compensation." Beginning in late 1993 and through '94, the FASB was under siege from protests over this Exposure Draft, which resulted in more opposition than any other change the board has made since it was founded in 1973.
The political and business opposition was swift, concentrated and complete. Grassroots letter writing campaigns were organized by a hi-technology business coalition that included International Business Machines Corp., Apple Computer Inc., McDonald's Corp., the National Venture Capital Association, the American Electronics Association (AEA) and several smaller technology firms. Congressional oversight hearings were conducted, during which FEI expressed its serious concerns. Legislation introduced by Sen. Joseph Lieberman, D-Conn., S. 1175, the "Equity Expansion Act," proposed an alternative approach to stock options that would have made options exempt from the FASB proposal. There was a similar bill introduced in the House of Representatives.
Eager to be responsive to their constituents, several members of the House and the Senate supported a "Sense of Congress Resolution" introduced by Rep. Anna Eshoo, D-Calif. and former Sen. Bill Bradley, D-N. J. Although such a measure lacks statutory authority, it did express congressional concern about the FASB Exposure Draft. The Senate Resolution was never voted on because the FASB backed down from its proposal, but there were more than 60 votes in the Senate to support the Resolution.
The opposition to the FASB went to such lengths, including organizing a good old-fashioned labor union rally. During the FASB public hearings in San Jose, Calif., more than 4,000 hi-tech employees rallied at a nearby conference center to oppose the stock options proposal and signed petitions intended for their Congressional delegations. Led by a marching band, the employees were addressed by state officials and federal legislators opposing the FASB proposal. The national print media covered the event and stock options accounting became the hot topic on talk radio shows throughout San Jose and San Francisco.
Opponents claimed that the proposal to charge stock options against earnings would cost them, on average, 30 percent of annual earnings, according to a 1994 AEA survey - the inference being that such a fluctuation in earnings would mean the demise of the "New Economy" engine that was fueling the U. S.' prosperity. Obviously, no member of Congress wanted to be held responsible for killing the goose that laid the "New Economy's" golden egg, so congressional opposition continued to build.
After about eight months of unrelenting political heat, the FASB backed down from its original Exposure Draft and abandoned its intention to require companies to report as an annual expense the value of stock options in favor of additional disclosures. Bowing to political pressure and corporate opposition, former FASB Chairman Dennis Beresford acknowledged that the threat of congressional intervention heavily influenced the FASB's decision. James (Jim) Leisenring, then-FASB vice chairman, and a disciple of stock option expensing, emphasized that the Board had not altered its position that stock options have value, and that their value can be estimated and included on financial statements, but the threat of Congress taking this matter into their own hands was a factor to shelve further consideration of the issue.
Today, Jim Leisenring is a member of the IASB and his strongly held position that stock options should be charged against earnings has not wavered. In addition, IASB's Chairman Sir David Tweedie believes that investors are ill served by existing regulations for stock options. The combination of these two IASB members, coupled with the hi-technology industry's ability to re-ignite its swift and concentrated political opposition - as witnessed almost seven years ago - will make the new IASB's priority agenda indeed a very bumpy ride.