(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.)

Roundtable on Stock Options Reveals Serious Divide

A recent roundtable on accounting for stock options demonstrated that the issue remains contentious as domestic and international accounting standard setters move towards requiring the expensing of options. Sen. Mike Enzi, who chairs the Senate subcommittee on securities, organized the roundtable. He assembled a panel trust of prominent business people and financial experts to discuss stock option expensing.

While defending the independence of the Financial Accounting Standards Board, Sen. Enzi expressed disappointment over the fact that the board seems to have made up its mind to expense stock options before it listened to all the evidence. The senator hoped that FASB, whose chairman, Robert Herz, participated in the roundtable, would consider the arguments presented at the discussion. However, judging from comments made during the discussion by Mr. Herz, Sen. Enzi said he was concerned about FASB's objectivity more than he was before the roundtable began.

At a recent public meeting, FASB tentatively decided that goods and services received in exchange for all forms of stock-based compensation, including fixed plan options, result in a cost that should be recognized in the income statement as an expense and that all exchanges involving stock-based compensation should be measured at fair value. Chairman Herz said that FASB plans to issue a proposed standard for public comment in the fourth quarter of this year. Prior to making any final decision on any changes to the accounting for stock-based compensation, Mr. Herz promised to consider all of the input received in response to any proposal. He pledged that FASB would not issue any final standard until it has carefully considered the views of all constituents.

Noting that some 200 public companies have made it clear that they intend to expense, Sen. Enzi urged FASB to detail the valuation methods those companies have chosen to employ, as well as management and investor satisfaction with those methods, and take that data into account in its decision making. Noting studies on the shortcomings of the Black-Scholes formula, Sen. Enzi also wants to move away from that formula and "do all the heavy lifting necessary to ensure that we get it right the first time."

Criticizing FASB's tentative decision to expense options, Sen. Barbara Boxer said there is no generally accepted way to derive a cost for employee stock options. She also emphasized that FASB did not adequately consider alternatives to expensing. If finalized, she believes that the rule will hurt the economy and reduce the ability of companies to retain and attract skilled workers.

Sen. Boxer, along with Sen. John Ensign, has introduced bipartisan legislation directing the SEC to review the matter. The bill directs the SEC to weigh the value of greater disclosure as an alternative mechanism for informing investors on stock option programs. While that evaluation is being made, the SEC would not enforce the FASB decision. More specifically, the Broad-Based Stock Option Plan Transparency Act of 2003 directs the SEC to require increased and improved disclosure on financial statements of company employee stock option plans. It also requires the SEC to monitor the effectiveness for investors of enhanced disclosure requirements for three years and report to Congress on that evaluation. During that three-year period, the SEC would not recognize as a Generally Accepted Accounting Principle any new accounting standard on stock options.