December 26, 2000, 12:43 PM — REPRESENTATIVES OF THE SENATE Republican High-Tech Task Force recently toured Silicon Valley to get a better handle on the technocrats' election-year concerns. And much to the feds' surprise, the number-one issue has nothing to do with technology.
Instead, the hot topic is accounting. The Valley is agonizing over a new pair of proposed accounting standards that, if adopted, would change how companies report stock-based compensation, mergers and acquisitions to the IRS. These proposals -- currently under review by the Financial Accounting Standards Board (FASB), the private sector organization that writes the rules for number crunchers -- haven't received a lot of publicity...yet. Here are the proposals and why business leaders don't like them:
Stock options: The FASB is proposing that companies that reprice their employee stock options (a common corporate carrot offered to employees following a market dip) record these new values as a variable plan expense. In other words, if Company X wants to lower its options price so its employees can buy more stock, then the company would have to record as an expense the difference between the new, lower price and any later increase in the share's value. CEOs naturally are averse to taking this hit. They also feel it puts a crimp in their abilities to recruit and retain workers.
M&As: The FASB is also exploring whether to adopt an international standard for taxing M&As. The purchase method would replace pooling of interests, which most high-tech companies now use. The difference? With the pooling method, principals in a merger or acquisition combine their assets and take a one-time, upfront tax charge against earnings for "goodwill expenses" -- the estimated value of the acquired company's in-process research and development and other intangibles. But under the rules of the purchase method, companies would have to assign specific dollar values to intangible assets, such as R&D, and then amortize those costs over future earnings for up to 20 years. Proponents say the purchase method is a more accurate representation of the true cost of a takeover, but the CEOs fear it might discourage M&A activity because a post-merger reduction in earnings would be discouraging to analysts and investors alike.
Right now, both issues are mired in the usual hearings, but expect to hear more about them. After all, the high-tech task force wouldn't have come to the Valley if it wasn't looking for high-tech cash. And that cash won't be forthcoming unless legislators attend to these FASB regs.