If the FASB has its way, companies will have to charge the fairvalue of stock options against earnings in the future.
This could create an accounting nightmare, and might forcesome companies to abandon the incentive practice of givingemployees -- present and future -- a stake in the success oftheir business.
On Wednesday the Financial Accounting Standards Board(FASB), based in Norwalk, Conn., formally proposed thatcompanies recognize on their books an expense for all stock-based compensations, including stock options. "The expensewould be measured as the fair value of the award at the grantdate and would be recognized over the vesting period of theaward," FASB said.
The proposal would permit companies to disclose theseexpenses in footnotes for the three years beginning no earlierthan 1994. After that, the expense will have to be included inthe determination of net income.
The impetus behind these proposals is political. There's alreadyan uproar over executive compensation, which includes stockoptions. Proxy statements being sent to shareholders now arerequired to more fully disclose the pay, perks and optionsgarnered by top executives. But the issue -- precipitated by abill reintroduced in late January by Sen. Carl Levin, D-Mich. --now stretches to include stock options for all employees.
FASB Chairman Dennis Beresford said that "the board notedthat present practice in accounting for stock options producesinconsistent results -- depending on the type of option granted-- which impairs the credibility of financial statements. Webelieve that our current proposal would improve this area offinancial reporting." (Under current accounting rules, optionshave no impact on a company's earnings.)
FASB might believe this is an improvement, but the industriesaffected -- including biotechnology -- disagree vehemently. Abarrage of criticism has been launched against FASB; the boardreceived more than 400 letters even before Wednesday'smeeting, according to Debbie Harrington, FASB's manager ofpublic relations.
The letters of opposition included one dated April 2 fromTreasury Secretary Lloyd Bentsen, who said he would favoranother approach that could address the disclosure aspectwithout changing current accounting rules. FASB's Harringtontold BioWorld that Beresford is planning to meet with Bentsen'sdeputy secretary-designate early next week to discuss thematter.
"We're surprised and disappointed that the board chose toignore the strong recommendations of industry, the accountingprofession, the institutional investor community and even theClinton administration in deciding to require companies tocharge stock options against their earnings," said GeorgeSollman, co-chairman of the Coalition for American EquityExpansion (CAEE) of Washington, D.C., a group of technologycompanies and professional organizations formed to promoteequity compensation programs in the American economy.
"They've got their back up and are defending an obsoleteaccounting dogma," added Ken Hagerty, a high-tech lobbyistand founder of CAEE. "FASB doesn't recognize the importanceand validity of equity. They're requiring a double charge forthe privilege of granting stock options," he told BioWorld.
If FASB's proposal is implemented, "the entrepreneurial cultureof America's vital high-technology industries would beseverely damaged," Sollman stressed. That certainly applies tobiotechnology companies, which have long used stock optionsas a way to attract and hold key personnel. The options -- orthe right to purchase shares of a company's stock at a set, non-variable price usually over a period of years -- are also astrong incentive for high performance.
"A lot of biotech companies rely heavily on stock options torecruit and retain individuals to help the companies remaincompetitive," said Mike Motroni, vice president of finance atCalgene Inc. (NASDAQ:CGNE) of Davis, Calif.
One of the major sticking points in this issue is how to put avalue on stock options -- and when. The accounting professionitself hasn't come up with a way to do it. And the FASBproposal doesn't describe a method to arrive at a figure for"fair value," said Janice LeCocq, chief financial officer of IcosCorp. (NASDAQ:ICOS) of Seattle.
An accounting method is available, the Black-Scholes model,which was originally designed to value publicly traded options,such as puts and calls. But biotechnology insiders argue thatthe Black-Sholes method is totally inappropriate for valuingoptions on biotechnology stocks, whose prices are extremelyvolatile to begin with, and for which it is almost impossible toestimate the stock's appreciation over time.
It's been said that even professors Black and Sholes haveargued that their method doesn't apply in this case. And "howdo you attribute value to stocks that are 'under water?' "queried Icos' LeCocq. "Black-Sholes would give it a positivevalue.
"I don't think this (proposed change) will help the shareholdersunderstand what's going on with a company," LeCocq toldBioWorld. Calgene's Motroni agreed, saying, "It doesn't give theshareholders or the public any better insight into employeecompensation."
Fortunately, there's a long lead-time for companies andindustry representatives to interact with the FASB before itfinalizes its plans. FASB intends to issue an "exposure draft" inJune for public comment. The public comment period, whichwill last for about six months, will be followed by field-testing,public hearings and further board deliberations. In the interim,"we need to communicate to Congress and the media theimportance of equity compensation," CAEE's Hagerty toldBioWorld.
Carl Feldbaum, president-elect of the newly mergedbiotechnology trade organization, told BioWorld that BIO willavail itself of every opportunity to voice the industry's view."We'll comment rigorously and vigorously (on the proposal). ...We need to make sure they hear our message."
-- Jennifer Van Brunt Senior Editor
(c) 1997 American Health Consultants. All rights reserved.