Letter to Barron's

Messrs. Norton and Shenkir (Options Fix Needs Fixing, Barron's June 20, 2005) made a valuable contribution to the stock option compensation debate. Their sound analysis, which conforms to FASB's conceptual framework, is in stark contrast to rules adopted by those assigned with the task of keeping the capital markets true. This leaves one with the conclusion that the foxes are guarding the henhouse.

Although only mentioned in passing, the authors hit on a very important fact. "The derivatives fair value at settlement is $75 million... Interestingly, if the options qualify for a tax deduction [which it invariably does], the $75 million is deductible." The gatekeepers need to explain to the investing community what economic logic applies to the reasoning that allows a company to deduct the economic cost of stock option compensation for tax purposes, but to exclude it from the income statement.

We need integrity in the standard setting process, or to put more simply, remain true to FASB's conceptual framework and send the politicians packing.

Albert Meyer

Letter to Financial Times

Dear Sir/Madam:

Are we this easily duped? The Financial Times (June 3, 2005) reported that President George Bush nominated Christopher Cox to be the next chairman of the SEC and called on Cox to "vigorously enforce the rules and laws that guarantee honesty" in US capital markets and boardrooms. In the boardrooms of US companies, executives are meticulous about lowering taxable income by deducting stock-based compensation as an operating expense. They then turn and lobby Congress and the SEC to overrule FASB's attempts to bring that same expense into the income statement.

Canadian companies listed on the NYSE include stock-based compensation as an expense in the income statement, but for companies in the US, honesty in reporting takes on a different meaning. By SEC decree, US companies continue to ignore stock-based compensation for financial reporting purposes, but keep it as an expense in their tax returns. How absurd is this?

More absurd, odds are Christopher Cox will resume the campaign he waged in Congress to keep stock-based compensation in the tax return but out of the income statement. This is how the SEC "guarantees honesty" in the capital markets.

Albert J Meyer