FASB must not 'cave in' on employee stock options treatment, says S&P index chief

US accounting standards setter, the Financial Accounting Standards Board (FASB), should not "cave in" to corporate pressure by failing to require that companies treat employee stock options as an expense, warned David Blitzer, chairman of S&P's index committee, today.

"I am a big proponent that stock options are an expense and should be treated as such," said Blitzer, a key-note speaker at a risk management conference in San Antonio, Texas.

FASB is considering issuing new guidelines that will make companies treat their employee stock options as an expense and account for them in the income statement. Many companies that issue employee stock options, particularly technology companies, argue that it is technically impossible to assign a fair value to their options. They also argue that forcing companies to treat stock options as an expense would act as an incentive for companies not to issue them, and that this would reduce economic growth. Investors argue that any more information on stock options, even if it is only an estimate, would prove beneficial.

The Board proposed that companies be required to recognise stock-based compensation in the income statement using a fair-value method in the mid-1990s. But it backed down in the face of strong opposition and allowed the continued use of the 'intrinsic' approach to valuation, which is considered something of an irrelevance as it generally gives a compensation cost of zero.

"If FASB caves in like in 1995, then most investors will not have confidence in corporate reporting," added Blitzer.

The San Antonio Risk Management Conference – an End-User's Forum, is being hosted jointly by the Chicago Board Options Exchange, the Chicago Board of Trade and the Chicago Mercantile Exchange.