CA to record stock options as expenses
Accounting method we can understand
Computer Associates International Inc has announced that it plans to record the cost of new stock options as expenses, as it continues its efforts to improve the image of its financial accounting and corporate governance.
The Islandia, New York-based systems management vendor has been heavily criticized for its accounting methods in the last year, and its accounts are under investigation by both the Securities and Exchange Commission and the US Attorney General's Office. Those investigations are believed to focus on accounting that led to over $1bn in stock options being granted to three of its key executives in 1998.
The company has repeatedly denied that its accounting practices are suspect, but has taken steps to improve its corporate governance with the appointment of more outside board members and the adoption of new corporate governance principles. These moves, along with a $10m payment, were enough to deflect the threat of a fresh proxy battle with Ranger Governance Ltd for control of the CA board, and the company is now taking further steps to tidy up its accounting.
Specifically, CA is adopting the fair value-based method of recording stock options contained in the Statement of Financial Accounting Standards (SFAS) 123, Accounting for Stock-Based Compensation. Starting with the company's next financial year, which begins April 1, 2003, CA will expense all future employee stock-option grants over the vesting period at a fair value based on the date the options are granted. The adoption of this new accounting method is expected to decrease CA's earnings by $0.02 per share in the first year.
CA is the latest in a line of many big US companies that have decided to expense stock options. Although the practice decreases earnings, it is also proving popular with investors after the recent accounting scandals at Enron Corp and WorldCom Inc. In the last month Coca-Cola Co, Neuberger Berman Inc, Cinergy Corp and Amazon.com Inc have also announced that they will begin to expense for stock options.
One company that has avoided changing its stock option accounting despite pressure from both investors and politicians is Microsoft Corp. If Microsoft had expensed stock options in its most recent quarter, it is estimated that it would have reported net income of $903m rather than $1.52bn.