Out of sight: stock options can stay off your balance sheet—for now

Entrepreneur, August, 2004 by Stephen Barlas

FORCING ENTREPRENEURS TO ACCOUNT FOR STOCK options is unappetizing, say some members of Congress and entrepreneurs. That's why a House subcommittee passed legislation (H.R. 3574) in May restraining the Financial Accounting Standards Board (FASB) from finalizing a standard it proposed in March until two federal agencies complete an economic impact study. The Stock Option Accounting Reform Act also contains small-business provisions if and when FASB finalizes a rule. Current policy allows companies to choose whether to include stock options in their balance sheets or just as footnotes that do not count against financial bottom lines.

Sen. Mike Enzi (R-WY), sponsor of the Senate version (S.1890) of the House bill, believes businesses will have trouble understanding the proposed FASB standard. "This proposal is a game of hide-and-seek for a small business trying to find the appropriate accounting standard," Enzi said at a Senate hearing in April. At the hearing, Keith Carron, founder and president of CC Technology, a small business in Laramie, Wyoming, spoke out. He said if his start-up had a stock option plan at the time it sought a working capital loan, "The loss on our income statement due to expensing stock options would have resulted in our application being refused."

The FASB proposal provisions aimed at making compliance easier for small businesses include letting entrepreneurs measure compensation costs using a simpler "intrinsic value method," rather than the fair-value-based method that would be requited for most public enterprises. Also, non-public enterprises would have until 2006 to comply.

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STEPHEN BARLAS is a freelance business reporter who covers the Washington beat for 15 magazines.