This decision would make it quite difficult for emerging growth companies to secure a top notch Board of Directors because, in a nut shell, it just may not be worth their while to sit on the board. In addition, since many emerging growth companies often use independent consultants, their options would also have to be valued and accounted for using the Black-Sholes method.

It Is Back
The FASB proposal, which was originally ignited in 1994-95, was reignited in 1999 with an explosive reaction from the high tech community. The proposal was designed so that companies would have to report stock-based compensation as expense against income.

However, it is doubtful that the FASB expected the backlash that followed as many young high-technology firms rely on stock options for employee compensation. Some accountants say that pooling distorts business decisions, favoring mergers over internal investment and stock swaps over cash purchases.

The other side of that coin is folks in the technology industry who say they need pooling because today's accounting standards do not capture the assets that matter in their high tech world: top notch, savvy employee skills and customer loyalty. In addition, options have become a standard way of compensating employees, and the practice of repricing those options when a company's stock price drops has also grown.

Unhappy Campers
Two assistant professors at the Stanford Graduate School of Business, Steven J. Huddart and Mark H. Lange, say that the main roadblock is that there has not been an answer to the nagging question: "How do you determine the value of an employee stock option?"

According to Huddart and Lange, the FASB proposal is based on option-pricing models that were developed to value publicly traded options. The two professors further contend that the option-pricing theory for publicly traded options hinges on the notion that options are exercised at predicable points in time - a condition that they say does not apply to employee stock options.

A host of technology lobbying groups including the Technology Network, the Information Technology Association of America and the Software and Information Industry Association do not agree with the FASB's proposal because the change would affect start-ups that lure seasoned business and technology people to their boards with options. Keep in mind, one of the most critical issues to any start-up company that is "cash strapped" is to have experienced people sitting on their board.

Venture capitalist John Doerr, a partner at Kleiner Perkins Caulfield and Byers and Netscape Communications co-founder Jim Barksdale expressed their discontent over accounting for mergers and acquisitions by testifying before the State Senate Committee on Banking, Housing and Urban Affairs on March 2, 2000. Doerr told the Committee that pooling would cripple the technology industry and sabotage an important engine of growth for the US economy.

An Employee is an Employee, or is He?
On March 31, 1000, the FASB issued "interpretive" guidance on several implementation issues related to accounting for stock issued to employees (APB Opinion 25). Of the many questions addressed, the most significant were a clarification of the definition of the term "employee" for purposes of applying the option, and the accounting for options that have been repriced.

"The questions addressed in the interpretation are not new," said FASB Chairman Edmund L. Jenkins. "They have been raised by preparers and auditors of financial statements since APB Opinion 25 was issued in 1972. The Board based its decisions on the precepts of that Opinion and not on the concepts underlying our standard - Statement 123 - on stock compensation that became effective in 1996," he continued.

The Jury Is In
This is what the FASB has decided. For the purposes of applying Opinion 25, an individual would be considered an employee if the company granting the options has sufficient control over the individual as to establish an employer-employee relationship. (Yes, this means independent consultants). The employer-employee relationship, according to Jenkins, is based on case law and IRS regulations. However, the Board did make an exception to this definition for elected outside members of a company's board of directors.

"The Board agreed with many of the letters we received on this issue that directors serve the company in a unique capacity and should be granted employee status when determining the accounting for options under Opinion 25," said Jenkins.

What Opinion 25 Means for High-Tech Companies

Under APB Opinion 25, fixed option plans for employees - that is those plans whose terms, including price and number of shares granted, remain the same throughout the duration of the plan - have no compensation expense associated with the options when the exercise price is equal to the fair value of the stock at the grant date. That is an exception to the general requirement that all awards to employees in which the number of shares of the exercise price may change do have an element of compensation expense under Opinion 25.

"The Board concluded that, when a company directly or indirectly reprices options, it has changed the terms of the plan, which would make it a variable plan under Opinion 25," said Jenkins.

The interpretation is effective beginning July 1, 2000. The interpretation applies prospectively at that date for repricing that occurred after December 15, 1998. It also applies prospectively on July 1 to new awards granted after December 15, 1998 for purposes of applying the definition of the term employee.