|Author||Topic: Investment association AIMR commends International Accounting Standards Board fo|
|Investment association AIMR commends International Accounting Standards Board for issuing draft rule on expensing stock options
CHARLOTTESVILLE, VA, Nov. 7 /CNW/ - The Association for Investment Management and Research, a non-profit association of investment professionals worldwide, commended the International Accounting Standards Board for releasing an "exposure draft" today of a proposed accounting rule requiring that employee stock options be treated as expenses on corporate financial statements.
AIMR Senior Vice President Patricia Walters, CFA, said, "In putting this exposure draft forward, IASB quite simply is doing the right thing for investors. It is showing its global leadership and commitment to put the best interests of investors above the self-interest of corporations."
Walters said investment professionals have always known that executive stock options were compensation that should be expensed on the income statement.
"It doesn't matter how a company pays its employees - in cash, stock, candy bars or housecleaning services, for that matter," Walters said, "that compensation should be measured and recorded. Executives don't work for free, and anything they accept in lieu of cash has a value."
AIMR surveyed its financial-analyst and portfolio-manager members around the world last year and found that more than 80 percent of respondents use information about the value of stock options to reduce corporate earnings in their valuations models.
"The average investor - or the news media, for that matter - doesn't have the time or expertise to search the financial statements high and low and recalculate a company's income statement to figure out how much it really earned," Walters said. "If the recent scandals have taught us anything, it is that markets demand transparency, not hidden expenses and liabilities that distort earnings and dress-up the balance sheet."
The Association for Investment Management and Research(R) is best known as the governing body for the rigorous Chartered Financial Analyst(R) curriculum and examination program. The association also promulgates a Code of Ethics and Standards of Professional Conduct for its members and candidates, and sets others standards, such as Global Investment Performance Standards, or GIPS(R). AIMR's mission is to "advance the interests of the global investment community by establishing and maintaining the highest standards of professional excellence and integrity." AIMR's membership includes 117 local professional societies in 39 countries. Headquartered in Charlottesville, Virginia (U.S.A.), AIMR also has offices in London and Hong Kong.
|Stock Options Issue Awaits New Accounting Rules
BOSTON, Nov. 4, 2002 (Ventura County Star, Calif.) ¡ª Many investment professionals eagerly are awaiting stricter rules from an international accounting board, possibly as soon as [this] week, which could make it easier for them to gauge how employee stock options affect a company's bottom line.
"When it comes to a tech company, for example, if you don't get a handle on options, you can overvalue a company by 10 to 20 percent," David Blitzer, a managing director at Standard & Poor's, said at a financial conference this week.
The Association for Investment Management and Research co-sponsored the event, "Financial Reporting and Reality," with the Society of American Business Editors and Writers. The 60,000-member association, based in Virginia, represents securities analysts, fund managers and other investment professionals. "If I can get a better grasp of valuation, I can get a better deal for our portfolio," said Ralph Goldsticker, managing director of research for San Francisco-based Mellon Capital Management. "We're at the mercy of what's in the numbers. You do the best you can."
Better accounting for stock options was among several high-profile topics discussed at the Boston conference, which focused on how to close the gap between the data available in quarterly and annual reports and the true state of a company's financial health.
"The status quo is deficient and should be criticized," Jane Adams, senior analyst with Maverick Capital Ltd. in New York, said during a presentation.
"I think we as investors know that stock options do not have zero value."
During the 1990s bull market, stock options became a popular way to compensate executives, board members and employees at fast-growing, but cash-poor companies. Options allow a person to acquire company stock at a discount after working for a company a certain amount of time.
The Financial Accounting Standards Board (FASB), which sets the rules for U.S.-based companies, recommends companies recognize stock options as expenses on an income statement, while requiring disclosure of the value of outstanding options in footnotes of financial statements.
The AIMR and others criticize current reporting rules, contending options are a form of compensation and the fair value should be reported as an expense. Options have other costs to companies. Management sometimes buys back shares to address shareholders' concerns that option-created shares dilute the value of their holdings and such buybacks divert money from other uses.
"This is not to say that granting stock options is a bad thing, but there is a fiduciary obligation for management and board (directors) to use these options wisely," Adams said.
Companies long have argued that stock options are difficult to value, do not involve a direct cash outlay and shouldn't be considered an expense. But a few companies, including Coca-Cola Co., recently announced they will expense options as a way to boost investor confidence in the quality of their accounting information.
The International Accounting Standards Board, which sets standards for many overseas companies, is expected [this] week to propose new rules requiring companies to treat employee stock options as expenses. It could appreciably lower earnings at companies that issue a lot of options.
Though U.S.-based companies generally are not bound by the international rules, the FASB and London-based IASB announced last month they intend to more closely align their rules. A memorandum of understanding was released Tuesday.
Proponents of greater transparency in corporate finances say they'll fight for stricter rules to become the global standard, but there is expected to be fierce opposition from corporate interest groups. In Ventura County, many public companies issue stock options, including Vitesse Semiconductor and Amgen Inc.
Vitesse Chief Executive Officer Louis Tomasetta generated about $13 million in profits from options-related sales in 2001 before hard times in the semiconductor industry caused the Camarillo company's share price to plunge.
In one 2001 transaction, Tomasetta was able to sell shares, which he bought for $5.63 each, for more than $74 each on the open market, according to regulatory filings.
Vitesse's (Nasdaq: VTSS) shares rose 42 cents to $1.76 Thursday. Tomasetta and other company officials recently have purchased shares on the open market as a way of showing continued confidence in the company.
-- Deborah Crowe
To see more of the Ventura County Star, or to subscribe to the newspaper, go to www.insidevc.com
|November 9, 2002
Expensing options debate pits firms against investors
KPMG partner suggests tax concession to soften impact for companies
Wong Wei Kong
THE question of expensing stock options in Singapore may prove as contentious, or even more so, than the debate over mandatory quarterly reporting. And the debate is likely to pit companies against investors.
'Because of the wide use of share options as a means of employee compensation in Singapore, the proposals will affect many listed Singapore companies,' said KPMG's Singapore partner David Leaver. 'The earnings of these companies are likely to be affected by the recognition of stock compensation charges. As a result, some opposition may be expected from companies.'
Already, Singapore's largest listed contract manufacturer, Venture Corp, has voiced reservations about such a move. Its managing director Wong Ngit Liong said recently that Singapore should consider carefully the country's competitiveness in attracting global talent before deciding if companies should expense stock options.
He also said Venture treats stock options as a form of variable compensation, and if options are expensed, it may have to raise its fixed wages to lower the amount of options it grants. Venture is one of the biggest issuers of options here with 32 million outstanding options. According to one estimate, Venture's FY2001 net profit would have shrunk by 73 per cent had all options issued that year been expensed.
To soften the impact, companies could be provided with some form of tax concession, suggested Mr Leaver. 'If share options give rise to an expense in the companies' financial statements, a natural consequence would be for a tax deduction to be available for that expense. The challenge for the IRAS (Inland Revenue Authority of Singapore) is to keep pace with accounting practice.'
Investors, on the other hand, support the idea to expense options. The Association for Investment Management and Research (AIMR), an association of investment professionals worldwide, welcomed the International Accounting Standards Board's (IASB) move.
'In putting this exposure draft forward, IASB quite simply is doing the right thing for investors,' said AIMR senior vice-president Patricia Walters. 'It doesn't matter how a company pays its employees - in cash, stock, candy bars or house-cleaning services for that matter . . . that compensation should be measured and recorded.' AIMR said it surveyed its financial-analyst and portfolio-manager members around the world last year and found that over 80 per cent use information about the value of stock options to reduce corporate earnings in their valuation models.
Much of the debate will centre on the difficulties in estimating the fair value of options at the date of grant and the fact that the eventual value of options at the time of exercise may be very different from the estimated fair value at grant date.
The IASB, in its draft proposal, said fair value of options should be estimated at grant date. It said an option pricing model should be used, but did not mandate any particular model.
The most widely used option valuation method was developed in the 1970s by two economists, Fischer Black and Myron Scholes, and takes into account the stock's price when the option is granted and its historical volatility.
But while this model works well for short-lived traded options, it is not that easy to measure the sort of long-term options companies use to pay their employees. And the longer the option life-span, the harder it is to estimate volatility.
Even companies that have said they would expense options, like General Motors in the US, say a better method of determining a stock option's value needs to be developed. Said John Devine, GM's chief financial officer: 'We urge the accounting community and regulators to improve valuation methodologies to find a more accurate way to determine the value of stock options.'
Singapore's Council on Corporate Disclosure and Governance (CCDG) is expected to start looking into the issue of requiring companies here to expense options after the IASB, which Singapore follows closely, proposed a rule on Thursday to force companies to record the value of stock options issued to executives and employees as an expense.
CCDG will issue an exposure draft on the IASB proposal and gather feedback, which will then be studied by the accounting standards committee of the Institute of Certified Public Accountants of Singapore (ICPAS), said Ernest Kan, vice-president of ICPAS.
ICPAS would then send its comments to IASB, and CCDG will take a position after IASB issues its final proposal. The process is likely to take place over several months, stretching into next year.
CCDG, headed by Singapore Exchange chairman JY Pillay, was earlier set up to prescribe accounting standards for companies in Singapore. Its work includes issuing exposure drafts and gathering feedback on new proposals made by IASB, together with ICPAS.
The UK-based IASB has invited accounting standards bodies elsewhere to offer their feedback until next March, with the intention of having the proposal become law in 2004.
CFA Discussion Topic: Investment association AIMR commends International Accounting Standards Board fo
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