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Tech lobby loses stock options battle

WYSIWYG comes to the balance sheet

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Internet Security Threat Report 2014

US corporations must accurately reflect the value of stock options in their accounts from June next year, the accounting industry's board FASB ruled today.

The practice had drawn criticism from many sides, including Joseph Stiglitz, Alan Greenspan, Greenspan's predecessor at the Federal Reserve Paul Volker, John McCain and Warren Buffet. But the change,which was narrowly rejected more than a decade ago, was opposed by much of the tech industry which favored renumerating staff in equity, rather than higher salaries.

However, any sense of unity crumbled in July when Microsoft said it would expense stock options. The move may break tech CEO addiction to options, which critics have suggested leads to bubble valuations.

Corporations such as Intel had resisted the move even when their shareholders voted for it. Astonishingly, Intel judges the value of its stock options to be zero. Apple management, having campaigned against expensing options, now includes the figures in its accounts after its shareholders voted to overturn the practice. IBM and HP successfully fought off similar shareholder campaigns, albeit narrowly.

Small businesses are exempt from the requirement, FASB Statement No.123. FASB board member Michael Crooch said that full disclosure "improves the relevance, reliability, and comparability of that financial information and helps users of financial information to understand better the economic transactions affecting an enterprise and supports resource allocation decisions."

Republican Senator Pete Fitzgerald (Il.) who has spent a decade campaigning for the move, called expensing options as "an egregious accounting practice that contributed to the worst corporate accounting scandals in our nation's history.

"In the aftermath of Enron, WorldCom, Global Crossing, Tyco, Adelphia and other corporate scandals, Congress should be trying to ensure that corporate earnings reports are more, not less, reliable."

FASB would have passed the measure in 1993, but tech lobby sock puppet Senator Joe Lieberman threatened to strip it of its unique role as the private sector's accounting rulemaker.

PwC estimates that the practice distorts tech companies' accounts by $9bn, or less than $300 per company. If this is accurate, it shows that the move will hurt only a few, very large companies.

The move had been opposed by the Cato Institute, which consistently takes the admirable position that individual investors are responsible for the consequences of their own investment decisions. Fine. So why confuse them with the facts? ®

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