Rogue Missives Friday, July 18, 1997

Part 3:
A Compromise Found

A compromise came in late 1995 with the FASB Statement 123, which encouraged companies to adopt a "fair value method" of accounting for stock options, though it did not require them to do so. Even those public companies that have opted not to switch over -- which is to say, every company in America -- must now offer pro forma earnings disclosure as if the fair value method had been used. In other words, it's now possible for investors to check a company's annual report to see what it really would have earned if the company had included the fair value of options in its basic compensation costs.

A Dynamic Worth Considering

The differences can be dramatic: NETSCAPE'S <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP )") else Response.Write("(Nasdaq: NSCP )") end if %> earnings would have been reduced by 296% in 1996. Other firms have reported more modest adjustments. MCI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MCIC)") else Response.Write("(Nasdaq: MCIC)") end if %> would have seen earnings hit by 8.1%, PEPSI CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PEP)") else Response.Write("(NYSE: PEP)") end if %> by 6.9%, AMGEN <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> by 6.6%. Fortune recently cited a study by Sanford C. Bernstein analysts Michael L. Goldstein and Jonathan Freedman estimating that corporate profits throughout the 1990s have appeared 5% above the levels that would have been reported had the options accounting recommended by FASB been employed.

Defenders of the traditional options accounting have argued its virtues as a kind of industrial policy. Back in 1992, Microsoft CFO Michael W. Brown told Congress that stock-option grants "enable startup companies to create new jobs by attracting employees willing to take a risk for future capital gains" and "enable existing companies to reinvent themselves by adding entrepreneurial employees in the face of rapid change." Moreover, Stephen Wise, CFO of Legato Systems Inc., recently told The Wall Street Journal, "The whole concept of stock options is really geared from the point of U.S. tax strategy to supporting smaller companies. In my opinion, it's a business development incentive of sorts."

Part 4: A Senator Speaks Out

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