Senators move to block preferential employee stock options tax treatment

Four US senators will today introduce a new bill, the 'Ending the Double Standard for Stock Options Act', that will require US corporations to treat employee stock options in the same way in both their tax returns and financial statements.

The bill comes in reaction to a finding last month by a Washington-based tax policy group – Citizens for Tax Justice – that Enron avoided paying $625 million in taxes between 1996 and 2000 through the use of employee stock options and other preferential tax accounting devices.

The bill’s sponsors are Democratic senators Carl Levin of Michigan and Dick Durbin of Illinois, and Republican senators John McCain of Arizona and Peter Fitzgerald of Illinois.

According to senator Levin's office, US corporations currently enjoy an accounting 'double standard', in which they can deduct the expense of the difference between the stock option excercise price and the underlying stock at the date of excercise on their tax returns, without reporting the expense on their financial statements.

Under the new bill, stock option tax deductions would be limited to stock option expenses reported on financial statements.

The new bill proposes no changes in accounting standards for stock options. That issue is currently under review by the International Accounting Standards Board (IASB), which is scheduled to release an exposure draft on the matter in Q4 2002. In a September meeting, the IASB agreed in principle that stock options issued for employee compensation and as payment to other firms should be recognised as expenses on a company’s financial statements. Since September, the IASB has been focusing on how tomeasure stock option fair values.