Statement of the International Employee Stock Options Coalition: FASB Proposal Would Systematically Overvalue Employee Stock Options.Business Editors
WASHINGTON--(BUSINESS WIRE)--March 31, 2004
The following is a statement by International Employee Stock Options Coalition:
Accounting Board Proposal Will Make Financial Statements Less Accurate, Sacrifices Comparability and Hurts Rank-and-File Workers
The employee stock option expensing proposal released today by the Financial Accounting Standards Board Financial Accounting Standards Board (FASB)
Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). (FASB FASB
See: Financial Accounting Standards Board
See Financial Accounting Standards Board (FASB). ) will significantly distort companies' financial statements, making it impossible for investors to compare the financial picture of companies and penalizing rank-and-file workers.
"More than nine years after first proposing stock option expensing, FASB still has not come up with an accurate and reliable way of doing so," said Rick White, chairman of the International Employee Stock Options Coalition.
Employee stock options are unique financial instruments that differ in numerous and significant ways from freely-tradable stock options. Having made no progress on developing a way to value these unique instruments, FASB has retreated to the same two approaches - Black-Scholes and binomial binomial (bī'nō`mēəl), polynomial expression (see polynomial) containing two terms, for example, x+y. The binomial theorem, or binomial formula, gives the expansion of the nth power of a binomial (x+ - that it recommended in 1995.
"Neither of these models work for what FASB wants to use them for, and as a result, both substantially overvalue o·ver·val·ue
tr.v. o·ver·val·ued, o·ver·val·u·ing, o·ver·val·ues
To assign too high a value to: overvalued the painting. employee stock options," said White. "Both were designed for something entirely different - options freely traded on the open markets - than employee stock options. Furthermore, one method - Black-Scholes - has been thoroughly discredited dis·cred·it
tr.v. dis·cred·it·ed, dis·cred·it·ing, dis·cred·its
1. To damage in reputation; disgrace.
2. To cause to be doubted or distrusted.
3. To refuse to believe.
n. . The other - binomial - requires such a complex and dizzying array of assumptions and inputs that it will create an accounting free for all." "In addition," White added, "FASB has not given sufficient guidance on either model in its exposure draft, requiring companies instead to use so much guesswork, conjecture CONJECTURE. Conjectures are ideas or notions founded on probabilities without any demonstration of their truth. Mascardus has defined conjecture: "rationable vestigium latentis veritatis, unde nascitur opinio sapientis;" or a slight degree of credence arising from evidence too weak or too and speculation that the resulting financial statements will be highly inaccurate and lack comparability."
Since commencing its current project in August 2002, FASB has refused to consider alternative models that have been suggested, and has resisted all calls for field testing different valuation approaches. "There is something wrong with a process where the regulator steadfastly refuses to test models that many believe don't work and immediately rejects alternative models that its constituents suggest," said White. "On an issue as divisive, contentious and complex as stock options, we would hope that the regulator would bend over backwards Verb 1. bend over backwards - try very hard to please someone; "She falls over backwards when she sees her mother-in-law"
fall over backwards
behave, act, do - behave in a certain manner; show a certain behavior; conduct or comport oneself; "You should act to ensure an objective, open and consensus-driven process," added White, who also noted "there is still time for such a process to ensue en·sue
intr.v. en·sued, en·su·ing, en·sues
1. To follow as a consequence or result. See Synonyms at follow.
2. To take place subsequently. ."
For companies that grant options primarily to their senior executives, like many of the companies that have voluntarily opted to expense, an immaterial Not essential or necessary; not important or pertinent; not decisive; of no substantial consequence; without weight; of no material significance.
immaterial adj. distortion in their financial statements is not particularly problematic. But for companies that issue stock options to most, if not all of their employees, both the expense and the distortion will be huge.
"Because FASB's exposure draft will lead to gross overvaluation o·ver·val·ue
tr.v. o·ver·val·ued, o·ver·val·u·ing, o·ver·val·ues
To assign too high a value to: overvalued the painting. of employee stock options and corresponding investor confusion, companies will have little choice but to severely curtail or eliminate broad-based employee stock option plans. Those broad-based plans have rewarded hard work and innovative ideas from rank-and-file workers by giving them an ownership stake - a piece of the rock that makes them partners, not simply employees," said White. "The US is the global leader in technology and innovation for a reason," added White, "and we should not jeopardize jeop·ard·ize
tr.v. jeop·ard·ized, jeop·ard·iz·ing, jeop·ard·izes
To expose to loss or injury; imperil. See Synonyms at endanger. that leadership in the name of bad accounting."
For more information on why FASB's valuation models won't work, the benefits of broad-based stock option plans, and the binomial model, please visit our web site at www.savestockoptions.org
The International Employee Stock Options Coalition is comprised of trade associations and companies representing a diverse range of industries, including high-tech, manufacturing and service companies, in the U.S. and abroad that support broad-based employee stock option plans.