Expensing Options: A Reprieve?

The tech industry has unveiled an alternative options-valuation method that some view as a tactic to delay regulators' requirements

On weekdays, Jeff Solof is director of Sun Microsystems' (SUNW ) Web site. On weekends, he's a deacon at an Eastern Orthodox church in Worcester, Mass. But the 44-year-old father of two has a dream: When he hits his 50s, he'll cash in his 40,000 Sun stock options and become a full-time minister. Stock options "are a long- term incentive" to stick with Sun, he says.

Solof will be singing options' praises on Capitol Hill on Sept. 21 as part of an 11th-hour lobbying blitz by the tech industry. Techies want Congress to blunt a proposed accounting rule that would require companies to subtract the expense of stock options from their earnings. With a bill that would sharply limit expensing stalled in the Senate, the tech set doesn't appear to have a prayer. So the way seems clear for the Financial Accounting Standards Board to approve its new regs in December.


  But Silicon Valley and Route 128 aren't raising the white flag yet. Instead, they're opening a new front. On Sept. 14, lobbyists for Cisco (CSCO ), Genentech (DNA ), and Qualcomm (QCOM ) unveiled an alternative method for valuing options -- and called on FASB to delay its rule so the standards-setters can study their formula. Their goal: Keep the options issue alive to fight again next year.

That push for a delay is getting an inadvertent boost from the Securities & Exchange Commission -- despite SEC Chairman William H. Donaldson's strong support for FASB's independence. In an Aug. 19 letter, he implored Senate Majority Leader Bill Frist (R-Tenn.) and 14 other influential senators not to meddle with the standard-setters. But the SEC has final say over when the FASB rule takes effect -- and it has its own reasons for wanting to postpone it.

SEC staffers worry that Corporate America already is struggling to meet other accounting deadlines. The most onerous is a Sarbanes-Oxley Act requirement that execs and auditors evaluate internal financial controls. "There is so much that already is being asked of preparers and auditors that now is not a good time for immediate implementation of a new expensing standard," says SEC Chief Accountant Donald T. Nicolaisen. While FASB wants the rule to take effect in January, Nicolaisen thinks expensing should be put off a year.


  That suits the tech set -- but won't keep them from pursuing the new valuation approach to buy some more time. Business has long groused that FASB's favored valuation methods, including the widely used Black-Scholes model, overstate the cost of options. The plan offered by Cisco, Genentech, and Qualcomm would tinker with assumptions used in Black- Scholes on stocks' volatility and how long workers hang onto their options. The net effect: A 70% smaller hit to earnings, on average, than under Black-Scholes.

Initial reviews of the new formula are mixed. "The proposal has a lot of merit," says Fred Cook, founder of executive compensation consultants Frederic W. Cook & Co. Others view it as a ploy to keep FASB at bay. This is "the least possible expense model" for valuing options and "unquestionably a delaying tactic," says Lynn E. Turner, former SEC chief accountant and now managing director of research at proxy adviser Glass Lewis & Co.

Turner warns that delay won't make the SEC's job any easier. In 1999, the agency bowed to business pressure and put off for a year new accounting rules for measuring revenue. The critics never ceased their attacks. The tech lobby isn't likely to cry uncle any faster.

By Amy Borrus

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