Alan Greenspan has attacked companies’ use of share options saying they had helped to exaggerate profits and contributed to an inflated stock market. Greenspan said their use had ‘perverse effects’ on financial accounting that had to be reformed, particularly in the wake of the Enron collapse.
Sir David Tweedie, IASB chairman, said: ‘The fact that he’s concerned about the misallocation of resources will (add credence to the debate).’
At present there is no accounting rule for stock options anywhere in the world. But that is about to change.
The International Accounting Standards Board is unperturbed by the unwavering resistance from the corporate world and will publish its first draft standard in the autumn. US standard setters hit a brick wall in the mid-1990s when they tried to force companies to account for granting share options in their financial reports.
Finance directors have been just as vocal in the UK.
It is still unclear what the board will propose as a measurement tool but it is quite clear that it will not be moved on its opinion that share options are an expense and should be treated as such.
Research by the Federal Reserve has calculated that the substitution of options for traditional cash salaries and bonuses added around 2.5% to company earnings at the US’s largest companies from 1995 to 2000.
Greenspan has been quoted as saying: ‘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.’