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FASB to force companies to expense stock options

December 17, 2004

The Financial Accounting Standards Board (FASB), which sets the nation's accounting standards, has delivered a potential victory to shareholders. According to a statement published yesterday, companies will have to account for stock option expenses in their financial statements. "Small business issuers" and "nonpublic entities" will have to comply with the new rule after December 15, 2005. Other "public entities" will have to apply the rule after June 15, 2005. As FASB's statement points out, "such information specifically will help users of financial statements understand the effect that share-based compensation transactions have on an entity's financial condition."

Berkshire Hathaway CEO Warren Buffett, Federal Reserve Chairman Alan Greenspan, and others, have been pushing for this change. Many technology companies, however, are fighting against it. They claim that if they are forced to expense options, they will have to reduce the use of these options, which will hurt productivity. What they really mean is, shareholders will realize that options aren't free, and might demand an end to excessive executive compensation. In my view, there is no valid reason to hide the cost of options. Managers should be honest with their shareholders when discussing the company's financial condition.

Unfortunately, Congress has listened to the tech companies' complaints. The House of Representatives recently passed a bill that only requires companies to expense options that are granted to the top five executives, though this bill has not been passed in the senate. This legislation obviously makes no sense, because if it is logical to expense options for the top five executives, it is logical to expense them for all employees. Congress should stop interfering with the FASB and should allow them to ensure that companies provide accurate information to their shareholders. Let's hope the Senate defends accurate reporting and delivers shareholders a victory.