SEC Gives Leeway in Measuring Option Value

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.

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AP Business Writer Michael Liedtke in San Francisco contributed to this report.

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On the Net:

Securities and Exchange Commission:http://www.sec.gov

Financial Accounting Standards Board:http://www.fasb.org

© 2005 The Associated Press