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Stock Options: Another Tussle Ahead?

Jan 26

Written by: Jack Ciesielski
1/26/2006 7:48 AM

It's finally the time for Statement 123(R) to go into effect for all publicly-traded companies. Legislative efforts to derail the standard failed. So did efforts to minimize the value of stock options by creating a Potemkin village of a market for employee stock options, courtesy of Cisco Systems. And the SEC's recent proposals on executive pay disclosures require firms to include values of stock options based on Statement 123(R) accounting.

So you might think that the fight is over. Nope. Like a zombie in a George Romero film, this is the issue that won't stay dead.

What's happening now? Nothing overt, but the National Journal's Technology Daily (subscription required) reports a couple of interesting tidbits in a January 23 article written by Randy Barrett. To wit:

"Still up for debate is exactly how stock options should be counted. "There is considerably more work the SEC can do on valuation," said Jeff Peck, director of the International Stock Option Coalition.""

That might mean we'll see some old familiar arguments about the unfairness of valuing options in the comments on the executive compensation disclosure proposal.

Another tidbit in the article:

"Industry officials said they are waiting for the SEC to name a new chief accountant before the lobbying begins in earnest on the valuation issue. Donald Nicolaisen left that post in early November and his successor has not been announced."

If there's going to be "earnest lobbying", it'll certainly help the tech lobbyists to have a friendly face in the chief accountant's office. The selection of the chief accountant by Chairman Cox is going to be critical. It's bound to be his most highly scrutinized move to date.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.