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Statement of the International Employee Stock Options Coalition: FASB Proposal Would Systematically Overvalue Employee Stock Options.

Business Editors


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 (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 - 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 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. 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 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 to ensure an objective, open and consensus-driven process," added White, who also noted "there is still time for such a process to ensue."

For companies that grant options primarily to their senior executives, like many of the companies that have voluntarily opted to expense, an immaterial 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 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 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

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.
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Publication:Business Wire
Date:Mar 31, 2004
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