New accounting rules from the Financial Accounting Standards Board will require companies to treat stock options and grants as expenses after Jan. 1, although some companies ending their fiscal year in June will start expensing options against income in this quarter.
The Council of Institutional Investors recently submitted a letter to Thomson Financial, asking the company to only provide consensus estimates including option expense (after an initial transition period) as part of Thomson's First Call estimates. Thomson had been considering providing two consensus estimates, one including and one excluding option expenses.
How the changes are presented in financial filings to investors is expected to generate some discussion, with the Securities and Exchange Commission overseeing adoption of the principle.
Also, recent studies by Brigham Young University and the University of Minnesota found connections between lucrative stock options and grants paid to chief executives as compensation and companies that report accounting irregularities, have flawed accounting practices, or engage in risky business strategies.
The BYU study found that companies that compensate their executives with large stock packages tend to engage in possibly dangerous business strategies, leading toward larger capital spending or growth by acquisition. The University of Minnesota study examined companies that restated their financial results between January 1997 and June 2002. The study found that these companies were more likely to report accounting problems or faulty accounting practices that might have led to these irregularities if they were led by chief executives who were highly compensated using stock options or grants.
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