By MARCY GORDON
The Associated Press
Tuesday, March 29,
2005; 5:52 PM
WASHINGTON - The Securities and Exchange Commission upheld new rules
requiring companies to count employees' stock options against profits but
sweetened the pill for Silicon Valley by allowing for corporate latitude in
measuring the value of the prized perks. Under guidelines issued Tuesday by the SEC, companies were told that to a
reasonable extent, they didn't have to all use the same methods to value
employees' stock options. The new rules by the Financial Accounting Standards Board call for publicly
traded companies to record employee stock options as an expense beginning with
their first fiscal reporting period after June 15, a mandate that could
dramatically reduce the reported earnings of many big companies. The SEC's guidelines stressing flexibility, however, failed to ease the
concerns of computer chip maker Intel Corp., one of the major Silicon Valley
companies leading the opposition to mandatory expensing of stock options. "We continue to think it would be good policy and simple common sense to
delay" the June 15 deadline, Intel Corp. spokesman Bill Calder said. The Semiconductor Industry Association remains convinced that the expensing
rules are "fatally flawed," said George Scalise, the Valley trade group's
president. Echoing a familiar refrain of expensing critics, Scalise warned the rules
will discourage computer chip makers from handing out stock options to
rank-and-file workers, an about-face that would damage the United States'
competitive position in the global economy. Opponents have also argued that counting options against the bottom line will
complicate financial statements, discourage startup companies and hurt the
economy by stifling future innovation. The more flexible approach embraced by the SEC increases the likelihood that
the accounting formulas for valuing stock options will vary from company to
company - a situation that opponents of mandatory expensing say may make
financial statements even more befuddling. "We have wondered all along: how do you come up with accurate numbers to
expense options," Intel's Calder said. "The fact that you may have different
companies doing it different ways can only add to the confusion for
investors." Consistent with the FASB rules, the SEC staff said, it "believes companies
can choose from a number of models to estimate the fair value of stock
options." "The staff will not object to reasonable fair-value estimates made in good
faith ..., even if subsequent events indicate other estimates would have been
more accurate," a fact sheet released with the SEC bulletin said. It "is very
clear that the amounts presented in financial statements for stock option
expenses are estimates involving considerable judgment," the fact sheet
said. The FASB rules raised a firestorm of protest and lobbying when the
rule-setting board proposed them in March 2004, especially from Silicon Valley's
high-tech industry where stock options for employees created legions of
millionaires in the dot-com era. The perks for employees allow them to buy
shares of their company's stock in the future at a set price. If the stock rises
before the options are exercised, the employee can buy the stock at the
predetermined, lower price, then sell it at the higher, current price - and
pocket the difference. Under the current rules, public companies estimate the costs of stock options
in footnotes to their earnings statements. The financial impact is often
dramatic at high-tech companies that have been generously handing out stock
options to their employees for years. For instance, Intel's reported 2004 profit of $7.5 billion would have shrunk
by 17 percent to $6.2 billion had the company been forced to expense stock
options last year, according to company estimates. If it had expensed stock
options in its last fiscal year, Cisco estimated its earnings would have
declined from $4.4 billion to $3.19 billion, a 28 percent drop. Rick White, president of the International Employee Stock Options Coalition,
a group representing companies opposed to the new rules, said Tuesday, "While we
continue to believe that FASB's mandatory expensing standard is fundamentally
flawed, it appears at first blush that the SEC is trying to address some of the
problems with the standard." Cisco Systems Corp., another strident critic of mandatory expensing, also
took a more conciliatory tone. "This issue is important to all shareholders, and Cisco appreciates the SEC's
efforts to find a more realistic valuation that will address small, medium and
large business concerns," the company said in a written statement. In July the House voted 312-111, across party lines, to override FASB's
mandate. The legislation was backed by House leaders of both parties but stalled
in the Senate, where Banking Committee Chairman Richard Shelby, R-Ala., opposed
it. SEC Chairman William Donaldson has advocated mandatory expensing of stock
options as has Federal Reserve Chairman Alan Greenspan, billionaire investor
Warren Buffett and the Big Four accounting firms. --- AP Business Writer Michael Liedtke in San Francisco contributed to this
report. -- On the Net: Securities and Exchange Commission:http://www.sec.gov Financial Accounting Standards Board:http://www.fasb.org