The Council of Institutional Investors, Washington, wants the Financial Accounting Standards Board to ask companies to disclose the present value of their employee stock option grants as a separate cost in their income statements.
The council, whose members oversee pension funds totaling more than $650 billion in assets, already counted itself among those opposed to the FASB's controversial proposal requiring companies to write off the cost of stock option grants against their income.
Now, to accommodate the views of its union members, the council has toughened its stance on disclosures of the value of stock option grants.
The council previously had opposed anything beyond asking companies to disclose the value of stock option grants - as footnotes in their financial statements.
In a letter to FASB President Dennis Beresford last May, AFL-CIO Director of Employee Benefits Karen Ignani had suggested the accounting rule-making body require companies to separately list in their financial statements the dilution of earnings per share due to stock options granted or exercised; the estimated value of stock options granted but not expensed against earnings; and the impact on earnings per share of stock options given all executives and directors.
The AFL-CIO is neutral toward requiring companies to expense the cost of stock option grants against their income, said Mike Calabrese, the AFL-CIO's employee benefits counsel.
"It is compensation, it has value, but whether it should be recognized in accounting terms as a charge to earnings is really a score keeping issue," he said.
The council, however, fiercely opposes the FASB's proposal on expensing stock option grants against income. It also has suggested the FASB stop requiring companies to deduct the cost of other equity-based compensation from their income.
Separately listing the estimated value of stock options in income statements, while not charging those amounts against income, would "eliminate any perceived disparity of treatment between companies that use equity-based compensation and those that do not," wrote Council Executive Director Sarah A.B. Teslik, in a member newsletter. Such disclosures also would "acknowledge the compensatory and production-cost nature of these transactions, and give a clear warning about what is being paid to employees and what it will ultimately cost shareholders." she wrote.
Nonetheless, in a recent letter to FASB members outlining the council's proposal, Ms. Teslik encouraged them not to cave in to political pressures and adopt a rule "that would be troubling from an accounting point of view."
Rather than crafting a rule that succumbs to political armtwisting, Ms. Teslik noted many council members would prefer to see the accounting rule-making body implement its proposed rule requiring companies to write off the cost of stock option grants against their income.
Meanwhile, John C. Wilcox, chairman of the big New York proxy solicitation firm, Georgeson & Co., recently wrote to the FASB, saying its proposal on expensing stock options could prompt Congress to require individuals receiving stock option to pay taxes on any paper gains at the time of the grants.
Mr. Wilcox is a member of the issuer affairs committee of NASD, whose members are mainly small and start-up, cash-strapped companies that use stock options extensively to pay executives in lieu of cash. Imposing a tax on stock option grants received by executives of these small companies would all but kill the practice, he said.
"It seemed logical to me if these values are real enough to be included in the financial statement, Congress and the IRS are likely to conclude that these are income that should be taxed," he said.
He chided the FASB for functioning as the "supreme court of accounting" but failing to look at the implications of its policy decisions.