MANHASSET, N.Y. The Semiconductor Industry Association (SIA) said Thursday (Dec. 16) that a new accounting standard for stock options approved by the Financial Accounting Standards Board (FASB) will create serious problems for the chip industry while not achieving the goal of uniform financial reporting.
The new FASB rule, to take effect after June 15, 2005, mandates that employee stock option grants be recorded as expenses and deducted from profits.
According to the SIA president George Scalise, the rule would in effect force companies granting stock options to make subjective assumptions on the value of the options, in turn affecting stock share prices.
"The new stock option accounting standard formally adopted by FASB today will not result in better corporate financial reporting but will create new risks and problems for the semiconductor and related technology industries," said Scalise in a statement. "Even many ardent proponents of expensing stock options concede that the new FASB rule is so badly flawed that it is unworkable."
In recent months, a number of publicly-traded electronics companies have had to delay or refile financial statements and come under scrutiny by the Securities and Exchange Commission as well as shareholders because of various accounting irregularities. Scalise believes the FASB rule would further complicate financial reporting and lead to additional legal problems.
"This is an extremely dangerous requirement that could leave chief executive and chief financial officers vulnerable to criminal prosecution under Sarbanes-Oxley and open companies to civil litigation from tort lawyers," Scalise added. "It is patently unfair to require top executives to certify the accuracy of financial statements created by admittedly flawed accounting methods. Since the FASB rule requires speculation about future stock prices, it also creates an expanded risk of frivolous lawsuits targeting companies whose estimates of future stock prices do not materialize," said Scalise.
The SIA is not alone in opposing the FASB rule. The Senate Republican High Task Force said in a statement Thursday the FASB rule would be detrimental to start-up companies and their employees.
"The FASB ruling will have economic consequences," said Senator John Ensign (R-NV). "It will impede job creation and slow economic growth. Furthermore, our best and brightest minds could move to places like China, where the government strongly encourages the use of stock options for business growth."
Ensign added, "Our competition around the world has received an early Christmas present today. The Accounting Board has taken away one of the more important incentives that our American companies have used to be the global leader in innovation and entrepreneurship."
The SIA reiterated its earlier call for a period of field testing of the new valuation methods before putting them into effect.
"It would be a huge mistake to implement a rule that could well force many companies to curtail or eliminate their employee stock purchase and stock option plans without a period of field testing that might reveal any unintended consequences," Scalise said.