Stock option accounting: back from the '90s.

AuthorHeffes, Ellen M.
PositionDomestic News - Dennis R. Beresford - Interview

A big part of the longest economic expansion in U.S. history during the 1990s is attributed to the technology explosion that was driven by thousands of emerging-technology businesses. The financing for and growth of such firms was largely dependent upon awarding employees stock options as a substantial portion of their total compensation packages.

There was heated debate on the accounting treatment for such stock options, culminating in 1995, with the Financial Accounting Standards Board issuing FASB No. 123, "Accounting for Stock-Based Compensation," which was greatly contested.

Fast forward to 2004, with stock options again a hot issue--this time, being blamed for things from corporate scandals and executive greed to misleading financial statements. FASB is again on the brink of issuing a new standard, (Exposure Draft issued in late March), as is the international standard-setter.

The man at the helm of FASB when FAS 123 was enacted, Dennis R. Beresford, speaks about his thinking--then and now--with Financial Executive's Managing Editor, Ellen M. Heffes. Beresford served as FASB chairman for two consecutive terms, 1987-1997, and is now Ernst & Young Executive Professor of Accounting at the University of Georgia.

How would you describe the environment now for a standard on accounting for stock options? Did you expect it to resurface again?

BERESFORD: I think it's best to contrast now with the situation back in the mid-1990s, when I was at FASB. Then, virtually no one was in favor of expensing options, other than FASB board members. Now, we have about 400 or so companies that are already doing so--voluntarily. So, obviously, those people are supporting FASB's approach.

Back in the '90s, we had legislation proposed by Sen. Joe Lieberman (D-Conn.), which would have not only overridden FASB on this project, but also effectively put FASB out of business, because of requiring the Securities and Exchange Commission to go through and redo every project going forward.

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Legislation [now pending in Congress] is a lot less serious this time. With little support in the '90s, this time some members of Congress are very supportive, [and] Federal Reserve Chairman Greenspan is supportive. Most importantly, Sarbanes-Oxley has changed the whole equation. It's given FASB probably more independence. And not just Sarbanes-Oxley, but the problems that have happened in financial reporting, have caused companies to be a little more than...

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