Chief among the decisions made by the IASB in its September meeting, and one omitted from the press release (see IASB Invites Additional Comment on Share-Based Payment), notes FEI, was the "tentative decision" to adopt an international accounting standard that requires companies to assign a "fair value" to employee stock options.

In a press release issued by FEI, the association states it has consistently warned that such a move, which would require companies to treat the issuance of employee stock options as an operating cost, could ultimately undermine the IASB's goal of creating a single set of high-quality, understandable and meaningful global accounting standards.

"The IASB has an historic opportunity to provide leadership in converging accounting standards around the world," said FEI President and CEO Philip B. Livingston. "Unfortunately, some members of the IASB have insisted on restarting this acrimonious fight with corporations -- one that was settled only six years ago. Requiring expense recognition for employee stock options could well undermine any chance that we will see harmonization of accounting standards.

"Further, the priority given to this bitter issue, and the manner in which the IASB press release treated expense recognition as a foregone conclusion, has disturbing implications about the fairness of the IASB deliberation process going forward," Livingston said.

Phil Ameen, Comptroller of General Electric Co., said, "It will be important to corporations around the world to consider these recent decisions by the IASB. This adverse outcome, if sustained, will portend a quick erosion of corporate participation and support. Competing national accounting standards will become the global standards, with little competition from the IASB. Ultimately, companies that may be required to adopt IASB standards will be at a significant disadvantage in the capital markets."

Stock option accounting has been debated exhaustively in the U.S., culminating in a 1995 compromise that gave companies the option of including the charge in the income statement or on a pro forma basis in the financial statement footnotes. Virtually all companies choose the disclosure method, and investors and managers largely ignore the footnote information since the
methodology for valuing the employee options is inadequate to reflect the transfer restrictions, vesting requirements and long-term nature of employee stock options. Since 1995, stock options have continued to be tremendously important in enlisting employees at all levels to think and act like shareholders. That linkage has been important to the overall success of equity investments. As a regular matter of course, shareholders vote to approve stock option plans in annual proxy statements.

David Shedlarz, Executive Vice President and Chief Financial Officer of Pfizer, Inc., also commented, "I feel strongly about this issue as do many of my peers around the world. This is a disappointing step so early in the life of the newly formulated IASB. It threatens the much hoped for advancement of our global economy and could not have come at a worse time as companies and
countries deal with an international crisis and unsettled capital markets."

FEI notes that companies, especially technology and small to mid-cap companies, feel very strongly that stock option accounting should remain as it exists in the U.S. and that the value of employee stock options cannot be reasonably measured. Expense recognition can only lead to greater international divergence and a significant step back for the future of global accounting standards.    

Dennis Powell, Controller of Cisco Systems Inc., adds, "The IASB would be wise to learn from the protracted and intense debate in the U.S. over this issue. FEI encourages the IASB to adopt the U.S. model of accounting for stock options. That step would be a significant improvement for financial reporting around the world. The disclosure-based alternative provides the best of both worlds in accommodating the debate's opposing sides."

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