Aug. 1, 2005--As the Senate prepares to vote on the approval of Christopher Cox as the new chief of the Securities and Exchange Commission, small business owners are preparing to deal with the likely possibility that they will have to report stock options as a formal expense. In a hearing with a Senate committee weighing his nomination, Cox said he would make sure "that the rule is implemented as the markets expect."
While technically the SEC has little jurisdiction over private companies, industry insiders believe that the Financial Accounting Standards Board will follow the example set by the SEC and begin mandating options expensing.
"It's fairly clear to see that this standard isn't going to go away," said Mark Heesen, president of the National Venture Capital Association. "So moving forward, what we're looking for from the SEC is an example of how these expensing standards can be implemented in a way that is fair to smaller companies."
Since a private company's stock is not openly traded, there has been much debate as to how to determine the real-world value of a stock option. Two potential methods include having an accountant use mathematical pricing models like Black-Scholes or using an index of similar publicly traded companies to determine an option's value. Either method would most likely drive accounting costs up.
According to Heesen, "The difficulty lies in determining a method that can produce a figure that serves investors but, at the same time, does not cost smaller companies an exorbitant amount of money to come up with."