Independent Standard-Setting Process for Establishing Accounting
Standards for Private-Sector Entities (28-JUN-04, GAO-04-840R).
On March 31, 2004, the Financial Accounting Standards Board
(FASB) issued an exposure document on a proposed Statement,
Share-Based Payment, an Amendment of FASB Statements No. 123 and
95, which addresses the accounting for compensation to employees
in the form of equity shares, including stock options. GAO
recognizes that this is a complex and controversial issue on
which reasonable people can and do disagree. In light of the
above, there has been a renewed interest for the Congress to
legislate accounting rules for stock options. Notwithstanding our
and others' views on the merits of various accounting methods for
stock options, GAO believes that the principle of independence,
both in fact and in appearance, is essential to the credibility
of and confidence in any authoritative standard-setting
processes. With respect to the role of FASB in this and other
areas, we support its efforts, as the Securities and Exchange
Commission's (SEC) designated independent private-sector
standard-setting body, to identify issues for consideration,
prepare exposure documents, conduct outreach efforts and solicit
comments on exposure documents, and consider the resulting
comments in finalizing and issuing new accounting standards. This
time-tested and proven deliberative process has served to
strengthen financial reporting and ensure general acceptance of
the nation's accounting standards. This process is especially
important given the complexity and controversial nature of some
accounting standards, including the accounting for share-based
payments. We note that FASB has an established process in place
to obtain feedback from its constituent groups, including
financial statement preparers, auditors, and users such as
individual investors, institutional investors, lenders,
creditors, professional analysts, and various other parties.
These processes were established in order to balance the
competing interests and demands of the various groups while
providing standards that promote transparent, credible, and
comparable financial information. We believe it is critical that
FASB complete its analysis of comments received on its exposure
document on share-based payment and finalize its proposed
Statement in accordance with its established independent
standard-setting process. As a safeguard, the Congress has
provided the SEC with oversight responsibility for FASB
standard-setting activities. The SEC determined that FASB met the
statutory criteria established in the Sarbanes-Oxley Act of 2002.
In our opinion, the FASB's independent standard-setting process,
subject to SEC oversight, should be allowed to proceed in its
consideration of accounting for stock options.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-840R
ACCNO: A10717
TITLE: Independent Standard-Setting Process for Establishing
Accounting Standards for Private-Sector Entities
DATE: 06/28/2004
SUBJECT: Accounting standards
Financial analysis
Financial statements
Stocks (securities)
Private sector practices
Standards and standardization
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GAO-04-840R
United States General Accounting Office Washington, DC 20548
June 28, 2004
The Honorable Richard C. Shelby
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing,
and Urban Affairs
United States Senate
Subject: Independent Standard-Setting Process for Establishing Accounting
Standards for Private-Sector Entities
This letter provides our views, which we recently discussed with your
staffs, on the existing independent standard-setting process for
establishing accounting standards for private-sector entities.
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued
an exposure document on a proposed Statement, Share-Based Payment, an
Amendment of FASB Statements No. 123 and 95, which addresses the
accounting for compensation to employees in the form of equity shares,
including stock options. Our comments to FASB on its exposure document on
share-based payment are enclosed. We recognize that this is a complex and
controversial issue on which reasonable people can and do disagree. In
light of the above, there has been a renewed interest for the Congress to
legislate accounting rules for stock options.
Notwithstanding our and others' views on the merits of various accounting
methods for stock options, we believe that the principle of independence,
both in fact and in appearance, is essential to the credibility of and
confidence in any authoritative standard-setting processes. With respect
to the role of FASB in this and other areas, we support its efforts, as
the Securities and Exchange Commission's (SEC) designated independent
private-sector standard-setting body, to identify issues for
consideration, prepare exposure documents, conduct outreach efforts and
solicit comments on exposure documents, and consider the resulting
comments in finalizing and issuing new accounting standards. This
time-tested and proven deliberative process has served to strengthen
financial reporting and ensure general acceptance of the nation's
accounting standards. This process is especially important given the
complexity and controversial nature of some accounting standards,
including the accounting for share-based payments.
We note that FASB has an established process in place to obtain feedback
from its constituent groups, including financial statement preparers,
auditors, and users such as individual investors, institutional investors,
lenders, creditors, professional analysts, and various other parties.
These processes were established in order to balance the competing
interests and demands of the various groups while providing standards that
promote transparent, credible, and comparable financial information.
We believe it is critical that FASB complete its analysis of comments
received on its exposure document on share-based payment and finalize its
proposed Statement in accordance with its established independent
standard-setting process. As a safeguard, the Congress has provided the
SEC with oversight responsibility for FASB standard-setting activities. In
enacting the Sarbanes-Oxley Act of 2002, the Congress recognized the
importance of having an independent standard-setting process that
facilitates accurate and effective financial reporting and protects
investors. The Act specified criteria for the SEC to use for determining
whether a private-sector accounting standard setter's principles will be
considered as generally accepted. The SEC determined that FASB met the
statutory criteria established in the Sarbanes-Oxley Act of 2002. In our
opinion, the FASB's independent standard-setting process, subject to SEC
oversight, should be allowed to proceed in its consideration of accounting
for stock options.
We are available to discuss these matters further with you or with your
staff.
David M. Walker Comptroller General of the United States
Enclosure
(194456)
Page 2 GAO-04-840R Independent Standard-setting Process
United States General Accounting Office Washington, DC 20548
June 28, 2004
Director of Major Projects
Financial Accounting Standards Board
401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
Re: File Reference No. 1102-100
Subject: Financial Accounting Standards Board's Proposed Statement on
Share-Based Payment
This letter is in response to the Financial Accounting Standards Board's
(FASB) March 31, 2004, exposure document on a proposed Statement,
Share-Based Payment, an Amendment of FASB Statements No. 123 and 95, which
addresses the accounting for compensation to employees in the form of
equity shares, including stock options. The FASB's proposed Statement
would generally eliminate the ability to account for share-based services
using the intrinsic method and would require instead the use of a
fair-value-based method, which would generally result in companies
treating stock options granted to employees as an expense.
We support the concepts behind FASB's current proposed Statement requiring
companies to record share-based payment as an expense. In our view, stock
options and other forms of share-based payment have economic value and
represent a form of compensation expense. Therefore, we believe that the
economic substance of such transactions should be reflected as
compensation expense in the calculation of a company's net income to
accurately portray its financial results. The current standard, which
permits companies to choose between two methods, allows companies to
select the impact on net income. It also creates a barrier to comparable
financial information, both domestically and internationally, because the
choice of methods used will result in differences in reported amounts
across companies due to the different methods of accounting. We believe
that a requirement to expense stock options and other share-based payment
will provide additional transparency, clarity, and comparability in
financial reporting.
We also support the four principal reasons FASB cited for issuing the new
proposal: (1) addressing concerns of users and others that the use of the
intrinsic value method results in financial statements that do not
faithfully represent economic transactions, which can distort the
financial condition and operations of the issuer; (2) improving the
comparability of reported financial information through the elimination of
alternative accounting methods; (3) simplifying U.S. generally accepted
accounting principles by requiring the use of a single method of
accounting for share-based payment; and (4) enabling international
convergence and greater international comparability in the accounting for
share-based payment.
We appreciate your consideration of our comments and would be pleased to
further discuss these issues at your convenience.
David M. Walker Comptroller General of the United States Page 2
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