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+++++++++++++++ Congress is right to challenge options expensing By JAMES GLASSMAN Financial Times / May 27, 2004 Friday A battle has erupted between the US House of Representatives and the Senate over an accounting rule that could profoundly affect the way fast-growing companies do business and whether the economy continues to thrive. The issue is how to treat stock options, but the point of contention is whether questioning the actions of a private accounting board is interference in the work of independent professionals or the responsible discharge of a legislator's duties. Companies award options that executives and other workers can cash in years later if the stock price rises. Since no one knows what the options will be worth, it is impossible to value them accurately at the time they are granted. Yet the Financial Accounting Standards Board, the private body that sets US accounting rules, has been waging a long war to require options to be treated as expenses. In 1972 the FASB's predecessor ruled that options need not be treated as expenses "because of the concerns that (they) could not be reliably valued". But now the bureaucratic wheels are turning. The FASB issued its official proposal on March 31, with comments due by June 30. If it has its way it will institute options-expensing next year. Under current rules companies can choose to provide information in their financial reports about their options obligations, to estimate the expense without placing it on their profit-and-loss statements, and to show the impact on earnings as it occurs. Eliminating that choice is very worrying for policymakers, not to mention the many US corporate leaders who rely on options to attract motivated employees. With the FASB's new rule in effect, earnings for companies in the Standard & Poor's 500 stock index would have been 11 per cent lower in 2003 and 19 per cent lower in 2002. Executives say they will have to cut or eliminate their options programmes as a result. George Chamillard, chair man of Teradyne, the chipmaker, says options have become an important recruiting tool for Asian companies, and the US is losing some of its brightest engineers. It was these concerns that earlier this month caused an influential subcommittee of the House of Representatives to approve a bill that would stop the Securities and Exchange Commission, the main financial watchdog, enforcing the FASB rule. The bill would oblige companies to treat as expenses only the value of options granted to a company's top five executives. It would also exempt small companies from having to treat options as expenses and would delay expensing by new companies for three years. The bill, introduced by Richard Baker, the subcommittee's chairman, has a good chance of passing the House, but there are objections in the Senate. Richard Shelby, who heads the Senate banking committee, does not want Congress threatening "the independence of the FASB". He says the board's success "depends on its ability to remain insulated from the political process", and that a misguided assault is under way. Mr Shelby is a smart legislator, and there are respectable reasons to support the FASB's decision, but the senator's concern about "interference" is itself misguided. In 1973 the SEC subcontracted its responsibility for setting "financial accounting and reporting standards for publicly held companies" to the FASB while maintaining ultimate control. Just as they oversee the SEC, the US's elected representatives have the authority - as well as the moral and legal obligation - to review the activities of the FASB, especially when its decisions can imperil the US economy. The FASB has a single mission: "to establish and improve standards of financial accounting and reporting for the guidance and education of the public". Federal policymakers have a far broader mission. Even if the FASB's expensing proposal were cogent from an accounting and financial viewpoint - which many doubt - Congress has a duty to consider its economic impact. Mr Shelby is correct that Congress should not intervene in the FASB's normal work nor "politicise the rule-making process". But that is not what is happening. Instead, Congress is doing its duty. Mr Baker and more than 100 others in the House, plus many in the Senate, believe the FASB is moving down a path that could harm the US's competitive advantage in high technology. They want to slow the options-expensing express, and would be negligent if they did not take action to do so. The writer, a resident fellow at the American Enterprise Institute and host of the website TechCentralStation.com, is a member of the policy advisory board of Intel, which makes extensive use of employee stock options.
