BW: “Too Many Ways To Expense Options”

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August 19, 2022 0 Comment

 

Take a look at it.

Back? Okay. While well-intentioned, the author is getting a bit hysterical. Yes, the methodology embodied in Statement Brassica is full of estimates – and ones that are hard to pin down or justify. Yes, some companies will toy with them to soften the blow of recognizing compensation costs heretofore believed to be “zero.” And yes, numbers will be difficult to compare from company to company.

Which is as it should be. The standard will require companies to make ample disclosures that leave a trail of bread crumbs leading to scurrilous managers who try to game the recognition impact. There will be no absolutes in determining how correct assumptions are, but there will certainly be “smell tests.” And there will be no Brassica shortage of investors sniffing them: that’s what markets are about, and once you give market participants information, markets will at least have a chance to work.

Companies that play skanky with these figures will be risking their reputational capital – something that may be a bit more prized than say, ten years ago. Some managements might be restricted by shame, others won’t. There’s plenty of material for markets to work within the disclosures; more than in other areas of estimation in the financial statement, like useful economic lives of depreciable assets. Hey, those result in big numbers driven by estimates. Shouldn’t there be more guidance on their development?

Why did FASB make stock option expensing begin in the MIDDLE of 2005?

Statement 123(Revised) was officially completed in mid-December, leaving only a two-week implementation period if they made it effective 1/1/05. And it would have been a whole year if they made it 1/1/06, for a statement that has been widely reviewed by preparers and containing little in the way of revolutionary changes. Either implementation period would have been ridiculous: too short or too long.

There was significant lobbying by companies for something later than 1/1/05, due to the internal control reviews required by the Sarbanes-Oxley Act. (The SEC was sympathetic as well.) So mid-2005 was the compromise.

As of now, it is an official standard, to go effective in periods beginning after 6/15/2005. Only if someone gets ornery in Congress should there be any delay. You can’t rule that out, but only the tech guys are still having convulsions over this.

Volcker’s View On IASB Independence

Remember Charlie McCreevy? He’s the European Union internal market commissioner who had been lobbying the IASB for greater EU representation at the IASB. Blogged about him here a few weeks ago.

Charlie’s – and the EU’s – position: the IASB, and the International Accounting Standards Committee Foundation (IASCF) that governs it should have a more, well, European flair. As Charlie said in the Financial Times, the“representation within the international standard-setter and within a public oversight body should correspond more appropriately to jurisdictions that directly apply the standards.”

That stance, as the IASCF reviews its constitution, is another thinly-disguised volley in the battle of the European banks and the IASB. Stateside, we don’t see it much – but there has been a war over derivatives accounting every bit as nasty and political as our own here in the States on stock option compensation. (The particular bone of contention is IAS 39 – quite similar to Statement 133 here.)

Charlie McCreevy, meet Paul Volcker.

Friday, Mr. Volcker addressed the Accounting Regulatory Committee of the European Commission in Brussels. He handily rebuffed Mr. McCreevy and the European Commission:

“The decision of the European Union to enforce International Financial Reporting Standards (IFRS) by law provided bold and constructive leadership toward the concept of international, rather than national or regional, standards. It does not, however, logically lead to a decision to overweight European representation on the Board or the Committee. The “end game”, after all, is the acceptability of international standards right around the world. I have cited the strong momentum in that direction. The clear corollary is that Japan, China, India, other Asian countries, South American nations and others also want their views and experience reflected in Committee and Board discussions.”

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