Stock-Options Accounting Needs Watching

By E.E. Mazier

NU Online News Service, July 30, 2:40 p.m. EST?An accounting change being instituted by several major corporations reflecting financial records of stock options for high-level executives needs to be followed closely, according to a leading insurance industry trade group.

Soft drink giant Coca-Cola recently announced it would join a handful of large companies that count the cost of stock options as an expense on their books.

The announcement helped spark much interest in this accounting practice, with hearings in Congress touching upon the subject and articles on the topic appearing in the media, said the Alliance of American Insurers, of Downers Grove, Ill.

James Olsen, Alliance director of financial accounting, noted that stock options are a way to compensate management "without having to actually put out the cash."

It has become an effective means for some start-up or technology companies to attract "quality people" willing to work for the potential capital gains from the growth of the company stock, he said.

But the dilemma has been that while a company enjoys a tax deduction on its returns for stock options, the dollar amount of the options never appears on the company books regarding net income.

Although the accounting change has been discussed over the years, Mr. Olsen said that tech companies up to now have managed to keep the issue of expensing stock options out of the accounting guidance rules.

Now, "with all that is going on regarding transparency of numbers and exactly where a company stands from an earnings standpoint, this has become a hot topic," Mr. Olsen stated.

He said several companies have indicated that if expensing stock options is a way of being "as honest as possible with their numbers," they are in favor of doing so.

Mr. Olsen noted that The Washington Post is one such company. He also pointed out that entrepreneur Warren Buffet sits on the boards of both Coke and the Post, and that Mr. Buffet has long been a proponent of expensing stock options.

The Alliance is unaware of any insurance companies adopting the practice, Mr. Olsen said.

In regard to bills working their way through Congress, although the stock option issue has been "taken off the table through different means," Mr. Olsen believes the issue will return to the congressional forefront.

He acknowledged that an accounting change such as expensing stock options does not impact a company or the way it operates.

For one thing, information about stock options is already disclosed in footnotes. "A very astute investor can read those footnotes and calculate what the impact is," Mr. Olsen stated.

Proponents of the accounting change want to make it easier for an investor to identify the true impact of stock options on the company's earnings. "What is impacted is the perception of the investors," Mr. Olsen said.

In his view, the real key is the comparability of financial statements among companies and among years, he stated.

"How will it be presented? As a huge drop in income, a restatement of prior numbers?" he asked.

He added that the information must be comparable year to year so that an investor can ascertain the earnings trends. "It's not an easy fix where you all of a sudden drop in new numbers."

He remarked that, "It will certainly be a recordkeeping challenge to get all of this put in properly."

Finally, he stated that changing accounting practices to require expensing stock options can come about through legislation, the Financial Accounting Standards Board, or even regulations from the Securities and Exchange Commission.

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Stock-Options Accounting Needs Watching

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