Valuation Of Stock Options Moves To The Forefront Of The Debate

March 13, 2003 - Not unexpectedly, the Financial Accounting Standards Board (FASB) decided yesterday to open a new project on employee stock options. It was encouraging that during the Board’s discussion of the merits of opening such a project, several FASB members made clear that the issues surrounding employee stock options are complex and not subject to easy resolution, particularly in the area of valuation. Considering recent comments by FASB’s Chairman, Robert Herz, in favor of expensing, NVCA considers the Board’s move to seriously consider public comments regarding the measurement of employee stock options a positive development. The persistent pressure from the International Employee Stock Option Coalition, an NVCA led coalition, and our allies is clearly having an impact.

Due process requires that the Board reach the right answer, not the quick answer, and genuinely consider all, not just some, of the comments it receives. A consensus has formed that there is no accurate and reliable method to value employee stock options and that relying on existing methods will mislead investors.

Nevertheless, the Board’s discussion today shed no additional light on how the all-important valuation issue could be resolved. And, as one Board member stated, the International Accounting Standards Board has not focused on valuation with the appropriate level of specificity.

Several recent developments and actions have helped bring the valuation issue to the forefront including:

• The International Employee Stock Option Coalition’s (IESOC) comments submitted to the FASB, along with separate comment letters by the NVCA and many of the coalition’s members, including leading technology companies and several industry associations.
  
  
• A Senate letter submitted to FASB, signed by 15 Members including Senator Enzi (WY), Senator Allen (VA), Senator Lieberman (CT), and Senator Boxer (CA), voicing their opposition to expensing and their support of the economic benefits of broad-based employee stock option plans.
  
  
• Coca-Cola’s announcement that it would abandon its original innovative plan to value its employee stock options, and, instead will rely on the Black-Scholes method even though it has acknowledged that Black-Scholes is an inadequate valuation model. Several companies who have stated they will voluntarily expense stock options have also expressed their dissatisfaction with existing valuation models.
  
  
• Paul Volcker, Chairman of the Foundation that oversees the IASB and an opponent of stock options generally, recently stated that “there’s so much controversy about how to expense [stock options], it may conceivably even now kill the credibility of expensing them.”
  

Although significant challenges remain in convincing the FASB and IASB that mandatory expensing is not in the best interest of investors, recent development are encouraging. NVCA will remain engaged in this debate as we understand how important stock options are to fast growth entrepreneurial companies.

Questions about this issue or requests for any of the documents mentioned above can be directed to Jennifer Dowling at 703-524-2549 or at jcdowling@nvca.org.