Employee stock option follies.

• Position: From FEI

When a group of CEO's joined President Bush's tour of the Pacific Basin earlier this year, no one anticipated the brouhaha that would result about CEO salaries and the stock options they receive. But Congress saw an issue: Aren't stock options also compensation? Don't they cost companies money? Shouldn't this be accounted for on financial statements?

The SEC soon felt Congress' wrath and turned to the FASB. As a result, the FASB is again reviewing APB Opinion 25. Issued in 1972, Opinion 25 regards most stock options today as capital transactions. Its premise is that any appreciation of the value of the stock (between what the stock costs the employee and its fair value at the measurement date) may be of value to the employee but is not a cost to the company.

But the issue of whether employee stock options represent a liability or a capital transaction is complex and highly controversial. When Dennis Dammerman, CFO of General Electric, planned a West Coast trip this August, he suggested an exchange of ideas among executives at high-tech and entrepreneurial companies--which employ stock options to attract talent and would be most hurt by a change in accounting methods. Dammerman is also a trustee of the Financial Accounting Foundation (FAF), parent of the FASB, and has oversight responsibility on the stock option issue.

The meeting was coordinated by FEI member Paul C. Vilandre, professor of finance at Menlo College, and soon had the support of Deloitte & Touche, ShareData, Inc., Hewlett Packard, and FEI's Santa Clara Valley Chapter. Of the 45 who attended, most were CFOs and FEI members.

"The meeting confirmed my view that any accounting change will create significant problems for entrepreneurial companies," Dammerman said. "My main message, as one opposed to the proposed change, was that corporations need to express their views today. We cannot wait for the exposure draft, because by then opinions at the FASB tend to be cast in concrete." In fact, he believes the Board "has already determined that options should be accounted for, and the only issue it's discussing now is how."

That discussion has two aspects: What is the measurement date of the option? And how is the fair market value to be determined?

The two candidates for the measurement date are the grant date and the vesting date (when one has access to the option). One informal...