Home Skip to content Skip to navigation Skip to footer. Issue Expensing stock options. The International Accounting Standards Board IASB has passed a global accounting standard that would require the expensing of employee stock options on income statements.
The European Union EU is also changing its policy to require expensing to synchronize international accounting standards. Business Impact If FASB and the EU prevail and broad-based employee stock option plans are required to be treated as an expense, such plans will be threatened. The financial impact could be measured in billions of dollars. If adopted, Cisco will have to evaluate the affordability of its rank-and-file broad based options program and the likely result would be a far reduced broad based options program.
This would remove a major retention and recruitment tool and result in a major change in company culture: Status The Financial Accounting Standards Board FASB issued an exposure draft, which requires employee stock options to be treated as an accounting expense beginning in ; the exposure draft was open for public comment until June 30, Stock options are already accounted for, when exercised, as the earnings per share EPS is impacted.
All of the FASB comment letters, the vast majority of which are very much against expensing. He presented an alternative valuation for stock options, if they are to be expensed. In October, the FASB announced that its proposed rule regarding employee stock options would be delayed by six months and would take effect June 15, On December 16, , the FASB issued its final statement on " share-based payments " or stock options. With regard to the U. Congress, the House of Representatives passed a bill in July which would only expense the stock options of only the top five officers of a company HR The House sent a strong message that broad-based employee stock options are about jobs, competitiveness and employee ownership - not accounting.
The bill passed the full House by a vote with very strong support from both political parties. In the Senate, in October , 53 bipartisan Senators sent letters to Securities and Exchange Commission SEC Chairman Donaldson urging a delay in expensing stock options until field testing can be conducted and an accurate valuation model can be achieved.
The Senate companion bill to HR S. Congress did not include stock options legislation in a final omnibus appropriations measure that was passed in November Efforts to work with the Congress on stock options legislation will continue in France, Italy , Spain and Belgium recently vetoed an IASB compromise on a derivatives issue -- demonstrating unequivocally that IASB standards are not self-executing; that the European Union Member States can and will weigh in to block standards that they do not like.
Cisco Position Options should not be expensed: The potential dilution of each investor's share of company ownership is the real cost of employee stock options. Accurate, consistent and useful information about employee stock options already must be disclosed on a quarterly basis. Shareholders should have approval over stock options plans, as they do at Cisco.
To protect broad-based plans, Cisco is supportive of legislative efforts which would require the expensing of options of only the "top five" officers of all companies. Cisco congratulates the House of Representatives for recognizing the importance of broad-based employee stock option plans, especially at a time when U. Key Messages Broad-based stock option plans give employees at all levels a chance to own a "piece of the rock" and increase productivity for the company.
Options programs keep companies competitive in recruiting and retention - especially needed in time of global competition for engineering talent. As other countries are graduating many more engineers and math and science PhDs than the US - which lead to innovative new technologies and research - stock options must remain a key tool for recruitment and retention for companies. Employee stock options fuel innovation and the entrepreneurial spirit.
More countries are also recognizing that the promise of company ownership motivates all workers. China , for example, has the utilization of stock options at the center of its five-year economic expansion plan. Expensing options could lead to elimination or curtailment of broad-based options plans.
Currently there is no accurate, reliable and consistent way to value options - the current valuation method Black-Scholes is for options that can be freely traded, whereas employee stock options are often restricted - subject to vesting over years.
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