ACCOUNTING
Call them boring, but Wall Street analysts value one thing above all: predictable, steady earnings growth. Companies that consistently hit or exceed their earnings estimates are rewarded with buy ratings, easier credit, and, usually, higher share prices. Which explains the hubbub over seemingly arcane accounting questions being pondered by the Financial Accounting Standards Board (FASB, pronounced "faz-be"), the stolid guardian of the Generally Accepted Accounting Principles.
At issue is the way companies account for stock options. As it stands, the cost of options isn't considered an operating expense, while more pedestrian things - like salaries and benefits - are. In other words, the cost of issuing heaps of stock options to reward employees simply doesn't appear anywhere on the income statement. The result? Many companies, especially in the options-laden technology industry, are reporting artificially high earnings.
Of course, in the dry-as-dust world of double-entry accounting, there is no such thing as a free lunch. Since this spring, FASB has been taking public comments on proposed rule changes that could require companies to account for options as a line-item expense, using an "intrinsic value" system. The rules are likely to take effect in the fourth quarter.
FASB has tried this before. In 1995, the board issued a statement - FASB 123 - meant to require more complete accounting for stock options. But 123 allowed companies to bury the figures deep in the footnotes to their annual reports and, even worse, underestimate the true cost of issuing options.
This time, though, it looks like effective new rules will be issued. The question is how much impact this will have. Last year, the London-based research firm Smithers & Co. undertook a study of the 1997 earnings of the largest 145 companies in the United States and determined that if options had been properly accounted for, reported corporate profits would have been 56 percent lower on average. The technology giants fared the worst. Instead of reporting a profit of $3.4 billion in FY 97, Microsoft would have lost more than $15 billion. Likewise, after deducting the value of employee stock options, Dell and Cisco would also have been forced to post net losses.
FASB:www.rutgers.edu/Accounting/raw/fasb.
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