Cisco Leads Fight for Options

In an ongoing battle against expensing stock options, Cisco Systems Inc. (Nasdaq: CSCO), Qualcomm Inc. (Nasdaq: QCOM), and Genentech Inc. have given accounting regulators an alternative method for valuing options.

The method the companies presented to the Financial Accounting Standards Board is aimed at lowering the value of stock options if they are forced to treat them as expenses on their balance sheets.

Some background: Accountants and companies worldwide have been struggling for the past decade with whether options should be included in company accounts and, if so, what value should be put on them.

Those against options expensing say that it would lower their reported earnings, which would, in turn, lower stock values.

In the past, Cisco has argued that if stock options were expensed, it would drag on corporate earnings and companies would stop issuing options. That expense -- and failure to offer options as an incentive -- would force more companies to find cheaper labor in other countries (see Cisco Renews Options Parade).

Large options grants are often viewed as dilutive to shareholder earnings potential, because those options will increase a company's share count and they dilute corporate earnings. Cisco, interestingly, manages its options grants by using its cash to buy back billions of dollars of its own shares (see Cisco's Chambers Gets More Options).

The FASB says it will release a final standard for requiring companies to expense options by the end of the year. This standard will include how to value options.

It should be noted that hundreds of companies, notably Microsoft Corp. (Nasdaq: MSFT), now voluntarily expense options.

But Cisco, Qualcomm, and other companies would rather see a world where expensing options doesn't actually cost money. The technology companies’ options valuation plan differs in several ways from the current FASB proposal. First, it would allow companies to decrease the value of their options by taking into account the fact that -- unlike common shares -- employees can't sell their options to other people.

Additionally, the technology companies’ plan discusses whether valuing stock options by using movements in a stock index such as the S&P 500 would accurately reflect the cost of options held by an employee.

Cisco and its pals that presented the plan to FASB are members of the International Employee Stock Options Coalition (IESOC). The coalition is now backing a bill that would require companies to expense options for their five highest-paid executives. The coalition is pushing for this bill because its objective is to allow companies to have the broadest-based stock options plan for employees.

Kim Boylan, an attorney with Latham & Watkins, says the three technology companies’ valuation plan would be easier to implement than the FASB proposal. Boylan, by the way, is a consultant to Cisco and the IESOC. Of course, not everyone agrees with Boylan's description of Cisco's accounting proposal.

“Anytime that value is moved out of the corporation, it should be reflected immediately on the balance sheet,” says Nell Minow, an editor at The Corporate Library, an independent investment research firm. “We do that for everything else, so there is no reason not to do it for stock options.

“Why are the tech companies lobbying so aggressively against expensing stock options? Because right now it’s free money for them and they don’t want to give that up.”

— Joanna Sabatini, Reporter, Light Reading