LONDON – As the National Venture Capital Association (NVCA) watches nervously, the U.K.-based International Accounting Standards Board (IASB) is forging ahead with efforts to establish accounting standards for share-based payment plans, including the expensing of stock options granted to employees against a company’s bottom line. An international comment period on the paper outlining the IASB’s tentative conclusions closes Dec. 15.
The IASB, which was set up to aid in the convergence of worldwide accounting standards, is examining the question of share-based payments because several individual European countries were beginning to set their own separate standards on this issue, said Sir David Tweedie, chairman of the IASB. The board has tentatively decided that companies should recognize the cost of employee stock options on their financial statements, because the options are a form of payment and, as such, an expense which should be recorded, Tweedie said.
The NVCA opposes the IASB’s efforts in this area because it believes such a measure would discourage companies from offering option plans. “Having to charge options against earnings would cause companies to take an enormous hit against their P&L stream, so companies probably would stop offering options-which have been critically important to the growth of the venture industry,” said Paul Brownell, a vice president at the NVCA. Moreover, determining the actual value of employee stock options is a difficult and inexact process, Brownell added.
As of yet, the IASB has reached no tentative conclusions about an appropriate way to measure the value of the options or from what date to apply that measurement, Tweedie said. Indeed the IASB is only at the beginning of a lengthy decision-making process and is eager to receive as many comments as possible on the proposed plan. “We can be persuaded either way. People just have to be in contact with us,” noted Tweedie. “It is better for people to come into the debate early.”
Not wanting to take any chances, the NVCA is busy putting together a coalition of U.S. trade associations to map out an international strategy explaining why the IASB should not adopt the tentative standard, the NVCA’s Brownell said. “We think the U.S. has the best standards, so if they want to harmonize accounting standards why not adopt U.S. standards?” he asks.
The IASB’s actions concern the NVCA, because the European Commission is currently pursuing regulations that would require all publicly listed European Union companies to follow IASB standards in 2005. With most of the world potentially following IASB standards, the NVCA is worried that the Financial Accounting Standards Board (FASB), which sets accounting standards in the U.S., would feel international pressure to adopt the IASB standards.
The Securities and Exchange Commission requires American companies registered with the SEC to follow the standards of the FASB. Its standards allow companies to disclose their employee stock option plans in footnotes to their financial statements; the board believes it is preferable for companies to recognize their employee stock option plans as an expense, noted Edmund Jenkins, chairman of the FASB. In fact, the FASB only settled on its current split standard in 1995 after an intense political battle, which included significant pressure from Congress and industry groups to allow footnote disclosure, Jenkins added.
Companies prefer footnote disclosure, because it does not affect their profit statements, said Michael Bernstein, a partner and national director of the technology industry practice at accounting firm Grant Thornton. However, disclosure of an expense is never a better option than recognition of that expense, said Kimberly Crook, project manager at the IASB. “If you have a real expense, why leave it out? Footnotes are meant to be supplementary, not a substitute,” she said.
If the IASB adopted a more stringent method that proved to be successful, this could prompt the FASB to re-evaluate its policies, Bernstein added. “Supporters of this kind of accounting would go to the FASB and say, Look, several countries have adopted this method and it works. You may want to look at adopting this measure again,'” he said.
The FASB has no plans to revisit this issue, Jenkins said. However, were the IASB to put in a place a standard that required the expensing of stock options instead of simply encouraging the practices, the FASB might look at the issue again, he noted. “But we would only consider it at that time and it would target a new project subject to its own due process,” he said. “In the end, we could decide not to change it or we might not even take it up.”