Most Chicago area companies would see their earnings drop by lessthan 5 percent under a rule proposed Wednesday that would requirepublicly traded firms to deduct the expense of stock options theygrant to executives and other employees.
Among companies that would be hardest hit are those in the high-tech and telecommunications industries, which have long relied on"free" stock options to reward executives and employees.
The proposal is open to public comment until June 30; if approved,it would take effect for the fiscal years beginning after Dec. 15,2004.
Under generally accepted accounting procedures, the cost ofgranting stock options -- the right to buy a company's stock at a setprice at some future dates -- isn't charged as an expense until theoption is exercised. Even then most of the cost is taken as a taxdeduction.
The long-awaited proposal, spurred by the public's outrage overCEO pay scandals, marks a milestone in the 30-year history of theFinancial Accounting Standards Board (FASB), the Norwalk, Conn.-based board that sets accounting rules.
"It's a landmark move," said Don Delves, a Chicago executivecompensation specialist who advocates tying executives' compensationto their company's performance. "It's a reflection of the muchheightened awareness of the need for good corporate governance, moreaccurate accounting and a healthier system of executive compensationthat is sweeping the country right now."
Investors also are worried about the growth of stock options doledout in successive years to the same group of top executives. Whenthey exercise their options and collect shares, the result is awatering-down of a company's earnings per share.
The FASB proposed that companies account for the fair market valueof a stock option on the date it is granted.
The board's proposed rule would allow companies to use a varietyof formulas to calculate option values, including the so- calledbinomial model and the Black-Scholes model, developed by economistsFischer Black and Nobel Prize-winner Myron Scholes.
The models must use a minimum of six variables, such as interestrates, stock-price volatility and the vesting period, to calculateoption values, according to the proposed rule.
Leaving the valuation method to companies may create non-comparable financial statements, according to Kevin Hassett, directorof Economic Policy Studies at the American Enterprise Institute.
The FASB's proposal asks companies that prefer a single formula torecommend one.
The FASB also proposed the possibility that smaller start-upcompanies be allowed to wait until a stock option is exercised beforeits expense is measured.
For example, if an employee of a start-up firm exercised a $10option on a $50 stock, the company would incur a $40 expense.
Delves said he endorsed the idea because an option's intrinsicvalue on the date it is exercised is indeed its true economic cost.
David Ruder, a law professor at the Northwestern University Schoolof Law and a member of the board that oversees FASB's internationalcounterpart, said Wednesday that the FASB's willingness to consider adifferent standard for very small and start-up businesses showed thatFASB is seriously considering the business community's concerns.
FASB is coordinating its accounting regulations with those of theLondon-based International Accounting Standards Board, which also hasrequired companies to expense option costs.
Though FASB will encounter resistance to its proposed rule inCongress -- it caved in to similar pressures a decade ago -- Ruderbelieves there is no turning back this time.
"It's very unlikely either the (Securities and ExchangeCommission) will step in to cause the FASB to back down, or that theFASB will do so itself," said Ruder, who served from 1996 to 2002 onthe board of trustees of the Financial Accounting Foundation, whichoversees the FASB.
Contributing: Bloomberg News, AP
AT WHAT EXPENSE?
Here's how the expensing of options would have trimmed last year'sreported earnings per share, shown in dollars, from continuingoperations of Chicago-area companies included in the S&P 500.
Earnings Per
per share Pct. Company share decline +/--
Abbott 1.75 --.13 -- 7
Allstate 3.86 --.04 -- 4
Andrew 0.11 --.06 -- 55
ADM 0.70 --.01 -- 1
Aon 2.08 --.08 -- 4
Bank One 2.75 --.02 -- 1
Baxter Int. 1.52 --.25 -- 16
Boeing 0.89 0 NM
Brunswick 1.47 --.06 --4
Caterpillar 3.13 --.20 -- 6
Deere 2.64 --.11 -- 4
Donnelley 1.54 --.08 -- 5
Equity Office 1.26 --.02 -- 2
Equity Res. 0.43 --.01 -- 2
Exelon 2.41 --.06 -- 2
Fortune Brands 3.86 --.12 -- 3
Grainger 2.46 --.15 -- 6
McDonald's 1.18 --.17 -- 14
Molex 0.44 --.04 -- 9
Motorola 0.38 --.09 -- 24
Navistar -- 0.21 --.16 NM
Nicor 2.48 --.01 0
Northern Trust 1.89 --.21 -- 11
Peoples Energy 2.87 --.02 --1
Sara Lee 1.50 --.04 -- 3
Sears 11.86 --.15 -- 1
Tellabs -- 0.58 --.13 NM
Tribune 2.61 --.23 -- 9
Walgreen 1.14 --.05 -- 4
Wrigley 1.98 --.06 -- 3
NM: not meaningful
SOURCE: Credit Suisse/First Boston
No comments:
Post a Comment