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Greenspan calls for expensing stock options

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27 Mar 2002

In a (PDF 47k) yesterday, US Federal Reserve Board Chairman Alan Greenspan urged that companies recognise the fair value of stock options as compensation expense.

IASB is addressing this issue in its project on Share-Based Payment. Mr. Greenspan said:

The current accounting for options has created some perverse effects on the quality of corporate disclosures that, arguably, is further complicating the evaluation of earnings and hence diminishing the effectiveness of published income statements in supporting good corporate governance. The failure to include the value of most stock-option grants as employee compensation and, hence, to subtract them from pretax profits, has increased reported earnings and presumably stock prices....

The Federal Reserve staff estimates that the substitution of unexpensed option grants for cash compensation added about 2-1/2 percentage points to reported annual growth in earnings of our larger corporations between 1995 and 2000. Many argue that this distortion to reported earnings growth contributed to a misallocation of capital investment, especially in high-tech firms.

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