AeA Urges House of Representatives to Pass Stock Option Accounting Reform Act
H.R. 3574 Critical to High-Tech

Washington - July 8, 2004 - AeA, the nation’s largest high-tech trade association, today sent a letter to every Member of the U.S. House of Representatives urging support of H.R. 3574, the Stock Option Accounting Reform Act.  A full vote on the House Floor on H.R. 3574, introduced by Rep. Richard Baker (R-LA), is expected soon.

The following is the text of the letter from William T. Archey, President and CEO of AeA.

July 8, 2004

House of Representatives
Washington, DC 20515

Dear Representative:

As Congress gets ready to consider H.R. 3574, the Stock Option Accounting Reform Act, I wanted to take a moment to address some of the misconceptions relating to stock option expensing.  There has been a lot of demagoguery surrounding the issue of stock options recently, and with the Financial Accounting Standards Board (FASB) considering rules that would require the expensing of all employee stock options, it is imperative that we get the facts straight on this issue before it is too late. 

Assertion:  It is wrong for Congress to interfere with independent standards setters. 

Fact:  FASB has repeatedly acknowledged that it does not, and will not, consider economic and labor consequences when setting accounting standards.  Its job is strictly accounting.

We agree that FASB should be independent, but that said, if FASB’s actions will have widespread negative economic, labor, and competitiveness consequences, then Congress has not only a right but a responsibility to act.  One of the primary reasons why Senator Michael Enzi introduced the Stock Option Accounting Reform Act in the Senate is because FASB has repeatedly refused to consider economic concerns during its decision making. 

Assertion:  A number of companies have already started expensing stock options without any significant negative consequences.  If those companies can do it, why can’t all companies?

Fact:  Most of the companies that have begun to expense options do not have broad-based employee stock programs and only provide options to their most senior level executives – if they provide stock options at all.  In this respect, the high-tech industry is different, with companies providing stock options to most, if not all, of their employees.  AeA has found that the average high-tech company provides options to 84% of its employees.  FASB’s proposed expensing rules will disproportionately impact the high-tech industry by distorting the financial statements of companies that grant a significant number of options to employees throughout the ranks.

Assertion:  Only CEOs and other top level executives benefit from stock options.

Fact:  This is absolutely untrue in the high-tech industry where the overwhelming majority of stock options are granted to rank-and-file employees.  If companies are forced to expense options, many will cut back their broad-based employee stock programs, if not eliminate them all together.  Only senior level executives will end up receiving stock options.

Assertion:  This is simply an accounting change and will have no real impact on a company’s stock price since all companies will have to expense options and investors will understand this change.

Fact:  The sophisticated investor will probably be able to understand the impact of expensing over time; however, it is likely that the average investor will not.  This accounting change will create a new cost that will reduce a company’s reported profits, and high-tech companies that have broad-based employee stock option programs benefiting rank-and-file employees will be disproportionately hit.  This change will put high tech at a disadvantage since other industries will not have to report the same significant reduction in profits.

For smaller companies, this change will be an even bigger problem due to the uncertainty of how to value an option and the complexity of making this calculation under the valuation models FASB has proposed.  The cost alone will be a disincentive to providing stock options to employees throughout a company and will deprive small companies of an invaluable labor tool.

Assertion:  Stock options dilute company shares and investors do not understand this because companies only disclose dilution information in a footnote.

Fact:  Stock options do dilute shares.  In accordance with FASB’s current accounting rules, companies disclose the impact stock options have on a company’s earnings per share in footnotes that are often pages long.  These disclosures provide investors with information they need to understand the potential dilutive effect of stock options. 

We believe the real issue is that of transparency.  H.R. 3574, as passed by the House Financial Services Committee, would eliminate this concern by directing the S.E.C. to promulgate new rules that would increase the amount of information companies provide to investors in their disclosures, mandate that companies draft this information in “plain English,” and increase the uniformity of stock option related information so that investors are better able to compare information from company to company.

Congress and government regulators need more time to evaluate the impact stock options have on the U.S. economy and labor market, and need to protect the ability of companies to offer this important benefit to all company employees.  When H.R. 3574 comes to the Floor for a vote, we hope you will support this important legislation.

Thank you.

Sincerely,

William T. Archey
President and CEO

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Advancing the business of technology, AeA (formerly the American Electronics Association) is the nation's largest high-tech trade association. AeA represents more than 3,000 companies with 1.8 million employees. These 3000+ companies span the high-technology spectrum, from software, semiconductors, medical devices and computers to Internet technology, advanced electronics and telecommunications systems and services. With 17 regional U.S. councils and offices in Brussels and Beijing, AeA offers a unique global policy grassroots capability and a wide portfolio of valuable business services and products for the high-tech industry. AeA has been representing the voice of the U.S. technology community since 1943.

This page was last updated on 07/08/04.