(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Congress Enters Debate on Expensing of Stock Options

As the Financial Accounting Standards Board moves toward a full consideration of accounting for stock options, members of Congress on both sides of the issue have written to FASB expressing strong opinions on the matter. Senator Carl Levin, in a letter signed by thirty members of Congress, urged FASB to promulgate a standard requiring all employee stock option compensation to be shown as an expense on corporate financial statements. In his view, the current U.S. standard allowing companies to choose whether or not to report stock option compensation as an expense has lead to abuses linked to excessive compensation, inflated corporate earnings, and dishonest accounting.

The letter rejects the argument that difficulty in precisely estimating stock option values will result in expensing that would confuse investors. Sen. Levin pointed out that many accounting standards require estimated valuations. He emphasized that the better approach is to require all companies to use the same stock option valuation method to ensure that options are expensed and that the comparability of financial statements is enhanced.

At the same time, Rep. David Dreier, chairman of the House Rules Committee, and Rep. Anna Eshoo sent a comment letter to FASB opposing any effort to mandate the expensing of stock options, and instead proposing the disclosure of employee stock options. They were joined by a bipartisan group of 38 members of Congress. In the letter, the members feared that the expensing of stock options would lead to an inaccurate picture of a company's financial health due to the acknowledged difficulty, if not impossibility, of accurately valuing stock options that have yet to exercised. They also noted that such a requirement would have a negative impact on the technology industry, which has used stock options to attract the best and brightest workers.

While the members opposed mandated expensing, they did encourage the use of accounting principles that would give investors timely and accurate information. Citing expert opinion that the cost of options is already accounted for and disclosedto investors through diluted earning per share, the members said that investors would be better served by full disclosure of this diluted earnings per share number.