Information
Home
Calendar
About SCSC
Leadership Opportunities
Sponsorship

Membership
Benefits
Companies
Join the SCSC
Orientation
Renewal
SCSC Member News

Chapter Events
Inland Empire
Los Angeles
Orange County
Valley

SIG Events
eBusiness
CFO Forum
Technology SIG
Software Executive     Roundtable
IMPACT! Sales &
    Marketing

Other Events
BootCamp
Industry Events
Special Events

Annual Events
2003 Software Awards
VentureNet

Business Resources
Preferred Provider Network
Community Partners
SCribe Newsletter

About Us
Contact Us
Board of Directors
Location
Comments/Feedback

By Dean Samsvick, Managing Partner
KPMG Orange County

Technology companies have traditionally been among the most prolific users of stock options as compensation or incentives for attracting talent. This was particularly true during the mid to late 1990's, when seemingly never-ending stock price increases made stock options a highly sought after form of compensation. Today, however, the use of stock options has received a much higher level of scrutiny - especially the past few months.

Historically, stock options served as a method of compensating employees in a manner that did not result in a cash outlay and, in most cases, without a charge to a company's net earnings. Many sources - including Congressional leaders - are now reexamining the viability of a company to use such compensation with no effect on earnings. Many in both the private and public sectors are encouraging the Financial Accounting Standards Board (FASB) to require all companies to record an expense for the value of options issued to employees. Many well-known companies such as Coca Cola and Amazon.com have already announced that they will voluntarily begin to expense the value of options issued to employees. Alternatively, other Fortune 500 companies, including Cisco and Intel, have announced they have no plans to expense the value of options.

FASB Requirements Today*
FASB Statement 123 currently requires companies to calculate the fair value of stock compensation issued to employees. Statement 123 does not require however, that companies deduct this calculated value of stock-option grants to employees and executives from their bottom lines. Instead, expensing that value is optional. Companies are mandated by Statement 123 to disclose the "pro forma" impact on earnings of issued options in the footnotes of their annual financial statements. This represents what the bottom line would have been had options been expensed.
.
The FASB - the board that promulgates U.S. accounting rules - has recently proposed requiring companies to disclose on a quarterly basis the value of stock options issued to employees. This disclosure is now only required annually. The proposal also suggests increasing disclosure content as well as featuring it more prominently in the financial statements. Such additional disclosures would include the method of accounting for stock-based compensation, total compensation expense that would have been recognized if Statement 123's fair-value method had been adopted as of its effective date, as well as a tabular reconciliation of net income to pro forma net income as if the fair-value method had been applied.

In addition to more frequent and complete disclosures by all companies awarding stock-based compensation, the FASB is also considering what to do about companies, who in reaction to the above proposal, have voluntarily chosen to expense options. In an attempt to make the adoption of Statement 123's fair value methodology more attractive, the FASB has recently proposed accounting alternatives for companies that volunteer to subtract the value of the options from their earnings are as follows:

• The first choice, which is Statement 123's current approach, allows companies to expense options awarded in the fiscal year in which the decision to begin expensing options is made.
• The second alternative allows companies to expense both new grants and unvested options issued since the beginning of the fiscal year.
• The third method gives companies the choice to retroactively restate three years of prior statements to reflect options granted over those years.

By expanding the available transition alternatives, the FASB is hoping to encourage more companies to consider adopting the fair value approach for their employee options.

Given this dynamic accounting environment, it is essential that leadership at technology companies understands available alternatives, so they may critically evaluate their business objectives and determine which accounting strategies are most sound for their company's needs. This decision is actually two-pronged. Once a company decides to expense options, it must then determine which transition alternative (mentioned above) to adopt.

Assessing the Landscape and Moving Forward
Making the decision to begin expensing the value of employee options is a significant one. Before making this decision, executives should consider not only investors' attitudes, but competitors' decisions and the potential effects on both income and intercompany and period-to-period comparability.

As discussed earlier, the use of stock options as compensation to employees has been very popular with technology companies in recent years, since it allowed companies to provide significant value to employees, with no cash outlay or earnings charge. Given new pressure to expense the value of employee options, along with the depressed perceived and economic value of employee stock options, one might assume that companies will start exploring and evaluating other employee compensation plans. This would be due to the diminished inherent benefits of employee stock options versus other type of compensation plans. As this plays out, it will be interesting to assess the market impact as well as accounting impacts on the future use of employee stock options.

Dean Samsvick is managing partner of KPMG's Orange County office, and partner in charge of the Orange County audit practice.

All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
*Source, Financial Accounting Standards Board web site