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					Lobbying and a Single Set of Accounting Standards Worldwide: the Stock Options
Accounting Case


In 2002 the FASB and the IASB issued a formal agreement (Norwalk Agreement) of strict
commitment in order to remove any difference among existing US GAAPs and
International Standards (IASs/IFRSs) and to develop jointly any new standard. This
commitment has been renewed in 2006 with the memorandum of understanding (MoU)
that describes the goals and the deadlines for the completion of that project. Although the
defined goals of these agreements are clearly stated, several obstacles to their
achievement still persist. This paper aims to investigate the difficulties arising from this
convergence project by providing several arguments. The literature survey helps to
demonstrate that these difficulties are mainly based on the different framework
assumptions between US GAAPs and IAS/IFRS and on the lobbying activity of involved
stakeholders. Then, the analysis of stock option accounting issuing process is addressed
as an useful example of how the convergence that resulted in this case could have been
the outcome of the lobbying activity and of the behaviour of big companies and other
involved parties toward the FASB rather than of a real will to converge its own standards
with the IFRSs.

Field of Research: Accounting

Francesco De Luca
University “G. D’Annunzio” Chieti-Pescara, Faculty of Management
Department of Business Administration,
Viale Pindaro 42,
65127 Pescara - Italy
Tel: +390854537609
Email: fdeluca@unich.it

Ferdinando Di Carlo
University of Basilicata
Campus di Macchia Romana
Email: ferdinando.dicarlo@unibas.it

1. Introduction

This study aims to disclose the difficulties that the lobbying power exerted by various
stakeholders could bring on the recently begun convergence process between the US
Accounting Standards (US GAAPs) and the International Accounting Standards
(IASs/IFRSs). In fact, the FASB and the IASB issued a formal agreement in 2002 (Norwalk
Agreement) in order to remove any difference among existing US GAAPs and International
Standards (IASs/IFRSs) and to develop jointly any new standard. The aims of this
agreement consisted of committing to converge US GAAPs and IFRSs and develop high-
quality compatible accounting standards that could be used for both domestic and cross-
border financial reporting. In doing so, the two standard setters undersigned a new
memorandum of understanding (MoU) in 2006 in which they described the goals and the
deadlines for the completion of the project.
The background analysis will point out some key issues about the scopes and the
legitimacy of supranational institutions and the relationships that they have with local and
national institutions. By considering the accounting issues and globalization process of
accounting information, it comes out that the supranational institutions of this field have to
manage different powers in order to achieve their goals. Therefore, it is possible to agree
that the convergence process is a political process (Zeff, 2002), within which lobbying
plays a key role. Consequently, many doubts arise about the possibility of achieving the
goals of the convergence as such and this is due to the differences among the
assumptions underlying the above project. Moreover, the resistance to a single set of
standards worldwide is still pervasive even if it is quite concealed and there are several
arguments that suggest this (De Lange and Howieson, 2006), as argued below.
Moreover, referring to the convergence process, the analysis will introduce the case of
stock options accounting that is generally considered as an example of convergence
based on the acceptance of the IASB standard among the FASB standards. The issue of
APB Opinion no. 25 about stock option accounting started a long debate in the eighties
and in the first half of nineties, until the issue of SFAS no. 123 in 1995. From this moment
on the conflict between the US companies and the standard-setter bodies became harder:
in the US, the final result was the issue of a revised version of SFAS 123 (SFAS 123R,
2004); in Europe, the outcome was the mandatory adoption of IFRS 2 (2004), imposed by
the European Commission to the listed companies of its Member States. In both cases,
the mandatory recognition of a cost (personnel) for stock options has been required, and
the measurement standard of it was the fair value of the equity instruments at the grant
It will be demonstrated, through a specific analysis, that the entire evolution of the FASB
principle at issue has been strongly influenced by the lobbying activity of big US
companies and of some members of the Congress (Dechow, Sutton, Sloan, 1996). On the
other hand, the issue of IFRS 2 has been the result of a significant lobbying activity by
constituents as well (Zeff, 2002; Hill, Shelton, Stevens, 2002; Giner and Arce, 2007). This
has been due to the relevant economic consequences that the accounting regulation of
stock options could have had on the wealth of corporate stakeholders. This process needs
to be elaborated further, especially about the path that led in 2004 to the adoption of the
IFRS 2 rules in the SFAS 123R issuing process with convergence purposes: it seemed to
be the FASB to follow the IASB‘s decisions, but the situation appears quite problematic
and the FASB‘s choices have been influenced more by the needs of the US companies
and other groups of stakeholders rather than by a real will of convergence.

2. Literature background

Given that through financial accounting companies provide a set of detailed information
mainly for investors, creditors, managers, unions and government agencies, globalization
process impacts on articulation of demands from those external users. Globalization
process impacts also on accounting technologies that have to be improved to keep their
own effectiveness in supporting users‘ decision process and capital allocation (Kieso et al.,
2007). Globalization is easily visible in banking and finance industry due to the great
diffusion of innovative tools in order to ease the cross-national mobility of capital toward
most effective investments, but it is generally a wider process that involves ―mobility of
goods, services, commodities, information, people and communications across national
frontiers‖ (Arnold and Sikka, 2001, p. 475). Moreover, this process has important effects
regarding cultural, social and environmental issues as some scholars highlight (Lehman,
2005; Graham and Neu, 2003; Mann, 2001; Held et al., 1999). However, the most part of
accounting literature has deepened the research about the concrete mechanisms that
predominate globalization process in order to find accounting implications in promoting
and carrying out that process.
Accounting has the challenging aim to provide a way to identify, measure and
communicate companies‘ performances in order to attract capital for their financial
requirements. But investors and creditors evaluate an investment opportunity only if they
are able to rely on financial information to compare income and assets employed by such
companies (Kieso et al., 2007). If all enterprises function solely in their own country,
accounting issues remain under the complete control and dominance of either a national
law system or a national standards setter in order to settle the main scopes of financial
reporting, the way of measurement of company facts and the regulation of stock market
functioning. Since globalization arises as an expansion of trade and capital investment
among countries (Hirst and Thomson, 1996), the world society assumes the shape of
inter-nodal multi-networks (Castells, 1996), where nodes could be stock exchange
markets, for example, in the network of global capital flows or board members in the
network of the international accounting standard setter (such as IASB).
The functioning of every network lives in the broadest spread of information. In this
context, individual government and local authorities gradually begin to lose their power and
sovereignty especially in regulating business, banking and finance (Ohmae, 1995). This
power and sovereignty has been devolved to many international and supranational ad hoc
institutions, which have taken over in regulating the multiple flows and facilitating the
globalization process (Lehman, 2005). Capitals flow across financial markets all over the
world in search of an allocation that could be effective only if it is supported by reliable and
relevant information. Accounting plays a key role in order to provide that kind of
information to all users and to be a mechanism of diffusion of information (Ashbaugh and
Pincus, 2001). The accounting profession in general has tried to develop a set of
standards that could be the main reference for a fair, clear and complete representation of
a company‘s financial operations within a specific period of time. This common set of
accounting standards and procedures has a substantial authoritative support coming from
a legitimate rule-making body that makes them ―generally accepted‖ in a given area and
over time (Kieso et al., 2007).
A set of general accepted accounting standards (GAAP) is not static, but it grows and
evolves in order to be more coherent with the business and markets needs. Given the fact
that it reflects also the economic, entrepreneurial and market degree of sophistication, the
social, legal and political culture of a given country, it is logical to assume that different
countries use different methods to treat the same transaction. These differences cause
huge problems for many corporations that are multinational which do business in different

countries. Main difficulties lie specifically in the need of complying with multiple sets of
accounting standards depending on the country they are dealing with and this limits an
enterprise to raise capital in the international markets. At the same time, investors are
more and more inclined to diversify their holdings and manage their risk by investing in
different countries‘ stock markets. The only way to compare the financial results of
companies worldwide is having a single set of accounting standards that makes possible
to adopt the same ―language‖ in interpreting business facts. Demand for international
institutions has come both from preparers and users in order to save time and eliminate
the costs of reconciliation of financial statement to a country specific set of GAAPs.
In response to this problem, in 1973 the International Accounting Standards Committee
(IASC) has been founded with the major aim of developing a single corpus of high quality
standards with specific requirements such as providing few alternative practices, clarity in
their statement1, comprehensiveness2 and transparency of information 3. The International
Accounting Standards Board -IASB-4 promotes the use of these accounting standards and
encourages convergence of national and international ones. At this point two different type
of problems arise: the legitimacy of an international institution to rule also national
transaction and the issuing process that leads to the emanation of a new standard.
A global institution, as a multilateral organization, is based upon a sort of contract among
actors of the global milieu drawn up to ―establish stable mutual expectations about others‘
patterns of behaviour and to develop working relationships that will allow the parties to
adapt their practices to new situations‖ (Keohane, 1982, p. 331). Therefore, regarding the
first problem, Buchanan and Keohane provide an exhaustive analysis of legitimacy for
global governance institutions (Buchanan and Keohane, 2006). They argue that a global
institution, in order to function efficiently, must obtain the consensus of individual states
and a sufficient democratic involvement by these states in the process making activities. In
fact, it is only in this way that the single states can maximise their benefits without
surrendering any of their political sovereignty. However, at a practical level, Keohane
points out that in effect, to have a participatory democracy at a global level remains very
problematic, because the condition of individual participation in this process is often denied
(Keohane, 2006). Therefore, every attempt to achieve a participatory democracy would
hardly succeed. Every effort to improve legitimacy and effectiveness of a global institution
actions should instead be addressed toward achieving reasonable objectives such as
limiting abuses of power and avoiding the tendency to disregard the interests and the
preferences either of those inside a global institution‘s minority groups or outside its own
public. One of the most critical issues in a multilateral organization regards the
management of power to set its objectives and the means to employ in order to achieve
them (Keohane, 2006; Lehman, 2005; Arnold and Sikka, 2001; Ashbaugh and Pincus,
Considering the second order of problems it is useful for the present analysis to point out
that every national government or institution is likely to join a supranational institution only
if it has reason to believe that it would benefit from such action and this implies that every
participant is likely to encourage or discourage a specific decision according to its own
interests and stakes. With regards to international accounting standard setting, the IASB
affirms that the standards are developed through a formal process and a broad
consultation (due process) that involves accountants, financial analysts and other users of
financial statements, academics and organizations from around the world, by submitting
an exposure draft and collecting their comment letters before issuing the final standard.
Some authors highlight that the IASB role is to resolve conflicts among interested groups
by trying to find an acceptable solution to various constituencies (Zeff, 2002; Sutton, 1984;
Zeff, 1978). For this reason, an accounting standard setting process is a political lobbying
process that offers to potential participants several means to influence the IASB‘s

outcome. Furthermore, conflicts arise from the time of defining the objectives 5 and persist
in the differences that exist between a first block of a very few countries that have well-
developed and sophisticated accounting standard setting arrangements and a second
block of countries with less evolved accounting standard setting systems. This may lead to
a mistaken perception of the IASB in that it may be seen as an oppressive entity by the
latter group of countries (Keohane, 1982, p. 331) and consequently it could represent a
threat for the long term duration of the same IASB.
The constitution of a supranational organization, rather than being incompatible with
democratic sovereignty, could help democratic governments to consider also the interest
and preferences of those outside their own publics (Buchanan and Keohane, 2006), but at
a positive level it is possible to observe that the loss of sovereignty by governments has
significant consequences: every national organization, in fact, will exert its power in the
―new‖ shape of a political lobby toward the supranational institution and this not always
represents the certainty to achieve the main objective that the supranational institution has
defined. On the contrary, it may lead to the exact opposite, that is, not supporting the
stakes of investors and other users 6 (Zeff, 1978). Specifically, the political pressures in the
accounting standard setting process could occur in the shape of prescribing specific
accounting treatments, eliminating alternative treatments, imposing additional disclosure
requirements or tightening the allowed interpretations (Zeff, 2002). Besides, the more a
national standard body is developed the more the government and the accounting
profession of that state will exert a lobby toward the IASB which has reduced its national
power of regulating accounting issues (Stoddart, 2000). Moreover, it has been observed
that the IASB not only develops a single set of high quality accounting standards to
support participants in the world‘s capital markets and other users in decision making, but
also promotes the application of those standards worldwide and facilitates the
convergence of national accounting standards and International Accounting Standards
towards high quality solutions (Pacter, 2005).
It follows that the convergence project sees two main actors: on one side, the IASB as the
supranational institution and on the other side, the FASB as the standard setter of the
world‘s largest capital market. This explains the reason why the international debate about
globalization is high-pitched: on the one hand, ―hyperglobalists‖ affirm that nowadays
traditional territorial borders have lost their effectiveness and individual governments
cannot take any actions to regulate business, especially in banking and finance field; on
the other side the ―sceptics‖ believe that the national institutions, especially those
belonging to the most industrialized countries, have only changed their sphere of action
from regulating directly to a mode that is more indirect, but always continuing to play a
substantial role in the governance of global economic affairs (Arnold and Sikka, 2001).

3. The research questions and the methodology

In this paper it is argued that the goals of convergence project implemented by the two
major standard setters worldwide are clear and well defined in their attempt to improve
information usefulness across global businesses and capital markets. Nevertheless, there
are still some criticalities in their achievement due to the political lobbying on these
organizations on the part of national governments, multinational corporations and big audit
firms who seem to have still the power to control agendas in order to make the most from
global spread of economic activities (Lehman, 2005; Arnold and Sikka, 2001). The above
mentioned research background offers a useful model to investigate the concerns about
the feasibility and the likelihood of achievement of this relevant project. Given the main

issues regarding accounting global convergence process, this article aims to address the
following research questions:
      1.      Which are the main critical issues in the FASB convergence project with the
      IASB that could make it hardly realizable?
      2.      We take it as given that this ongoing project is based upon a real will to
      provide the best accounting solutions to improve financial information, but are there
      also other objectives that push standard setters toward convergence? And if so, what
      kind of influence could specifically be discovered, by analysing the stock options
      accounting case?

In order to provide an answer to these questions this paper starts by exploring the specific
incentives and frictions affecting the development of a deep relationship between two big
forces, such as the FASB from the one side and the IASB on the other side, on
international accounting standard issuing process. The study seeks to disclose the
sources of those criticalities and to understand if they are referred to specific external
influences deriving from the underlying objectives of a lobbying process. Therefore, this
article develops arguments according to the following course:
        1.     there are still several relevant differences between the two sets of accounting
        standards, that will be represented in order to highlight the difficulties in the
        convergence process;
        2.     the problem of political lobbying is investigated at an international level in
        order to demonstrate that the participation of the FASB in the process of
        convergence toward a single set of accounting standards is seen by the FASB more
        as a threat to its sovereignty and autonomy rather than an opportunity;
        3.     a specific analysis of the stock option accounting standard issuing process
        will show that, in this particular case, the behaviour of politics, markets, the IASB
        and the FASB suggest that the convergence project is unlikely to achieve its initial

4. The actual position of the IASB and the FASB

The European Union is a good example of a policy about accounting standards that has
bypassed convergence issues by adopting directly IFRSs by fiscal year 2005 for
consolidated financial statements of listed companies in the regulated market of every
Member State, (European Regulation no. 1606/2002). This policy has the clear objective
of eliminating barriers to cross border trading in securities by ensuring reliability,
transparency and comparability of company accounts. It has been calculated that IFRSs
will be the basis for financial reporting for about 7,000 companies in all countries subjected
to European regulations and directives.
The US situation is noticeably different. Given the advanced development of accounting
standards and of the capital market, there still may be many bumps on the road in the
establishment of one set of standards worldwide. The FASB has worked together with
other national accounting standard setters and the IASB on some matters of mutual
interest helping to propagate accounting methods toward all those countries who consider
US GAAPs and SEC regulations the best quality benchmark to which one may aspire
(Yamaji, 2005; Imhoff, 2003). This was generally the case until the most recent corporate
scandals that raised some doubts about the quality and the integrity of the US financial
environment. Some have suggested that the FASB is facing a very litigious society and
this has led to very detailed standards issuing (Kieso et al., 2007). Therefore, the ―rule-
based‖ distinctive of US GAAPs has been often used to hide the economic substance of

questionable transactions7 (Buchanan, 2003). Other authors have highlighted that
probably under a more ―principle-based‖ standards, such as IFRSs, auditors would have
had the chance to ensure the recognition and disclosure of the substance of transactions
(Benston et al., 2006; Schipper, 2003; FASB, 2002). Alexander and Jermakowicz (2006, p.
161)8 have even denied the usefulness of ―rules‖ by themselves, whether or not they are
based on ―principles‖.
These considerations, together with the growing acceptance of IFRSs in other countries of
the world, opened a context of criticism and reflection, thereby encouraging the FASB and
the IASB to issue a formal agreement of strict commitment in order to remove any
difference among existing US GAAPs and International Standards and to develop jointly
any new standard. This commitment was firstly announced in 2002 (FASB and IASB,
2002) when the Norwalk Agreement was signed by the FASB and the IASB which
committed to converge US GAAPs and IFRSs and develop high-quality compatible
accounting standards that could be used for both domestic and cross-border financial
reporting. The two boards agreed to remove existing differences between the two sets of
standards, to coordinate their future standard setting agendas, and to work on major
issues together. The new memorandum of understanding (MoU) (FASB and IASB, 2006),
that describes the goals and the deadlines for the completion of the project, aims to reach
a conclusion by 2008 about whether major differences in some few focused areas should
be eliminated through one or more short-term standard-setting projects and, if so, to
complete work in those areas.
At the same time after consultations with representatives of the European Commission
and the SEC staff and consistently with existing priorities and resources, the FASB and the
IASB have expressed the progress they expect to achieve on their convergence project in
the form of a list of 11 areas of focus (FASB and IASB, 2006). Some short term projects
have been completed by 2008 and the FASB and the IASB issued standards as follows
(FASB and IASB, 2008):
    by bringing U.S. GAAP into line with IFRSs, the FASB issued new or amended
      standards that introduced a fair value option (SFAS 159);
    the FASB adopted the IFRS approach to accounting for research and development
      assets acquired in a business combination (SFAS 141R);
    by converging IFRSs with US GAAP, the IASB published new standards on
      borrowing costs (IAS 23 revised) and segment reporting (IFRS 8).

In addition, the ongoing short term project includes the following areas of concern:
    the IASB has begun considering the comments to the exposure draft published in
     2007 on joint arrangements (joint ventures) and expects to release a final standard at
     the beginning of 2009;
    the IASB plans to publish a proposed standard on income taxes that would improve
     IAS 12, Income Taxes, and eliminate certain differences between IFRSs and US
    the FASB will review its strategy for short-term convergence projects in the light of
     the possibility that some or all US public companies might be permitted or required to
     adopt IFRSs at some future date9;
    as part of that review the FASB will solicit input from US constituents by issuing an
     Invitation to Comment containing the IASB‘s proposed replacement of IAS 12. At the
     conclusion of that review, it will decide whether to undertake projects that would
     eliminate differences in the accounting for taxes, investment properties, and research
     and development by adopting the relevant IFRS standards (IAS 12, as revised, IAS
     40, and IAS 38);

The Boards have chosen to defer completing projects on government grants and
impairment until other work is complete.
At their April 2008 joint meeting, the Boards agreed on priorities and milestones to be
achieved on those projects by 2011 (FASB and IASB, 2008). The Boards also agreed that
the goal of joint projects is to produce common, principle-based standards, subject to the
―due process‖. In 7 of the 11 areas identified by the MoU (FASB and IASB, 2006), the
Boards have either completed a common standard, reached similar conclusions, or are
currently working jointly to develop a common, high quality standard. In the other four
areas, the Boards are at different stages of developing their approach to the topic to
address immediate areas of concern. Moreover, these projects will occur in the context of
the ongoing joint work of the FASB and the IASB on their respective Conceptual
Frameworks (FASB and IASB, 2004)10. The IASB and the FASB adopted a flexible
approach to convergence and are focusing on issuing standards of the highest quality
possible, independently of the standard setter who issued the principles underlying them.
In developing high quality standards, a standard setter could opt both for FASB and IASB
guidance and in the case neither is adequate, they may develop a new standard.
Therefore, according to the above mentioned agreement, the convergence process has let
the Securities and Exchange Commission (SEC) remove the need of reconciliation for
financial statements of non-US companies listed on US stock exchanges and reported
under IASB GAAPs11.

5. FASB and IASB convergence project: some critical issues

The overall need for accounting harmonization is fueled by globalization. While the US
capital markets have been dominant, investors are interested in the broadest possible
access. The forces of accounting harmonization involve companies and investors that are
fully committed to an international standard (Buchanan, 2003). This is supported by the
long term efforts of a considerable array of accounting professionals, particularly the IASB.
There are also several arguments against harmonization and probably the most pervasive
resistance to accept IFRSs is the pressure exerted by the US: a global GAAP is a too
simplistic solution to a complex set of problems and it does not reflect issues associated
with national sovereignty, politics, culture, language, economic and business environments
(Ampofo and Sellani, 2005; McGregor, 1999). This, in particular for a country such as the
US, is a strong and hardly acceptable limitation of authority 12. This leads to the
consideration of how developed nations have ―imposed‖ their policies and standards on
developing nations because the former could gain more from the imposition (Graham and
Neu, 2003).
Referring to the recent memorandum of understanding between the FASB and the IASB,
Sir David Tweedie, as chairman of the IASB, affirmed its confidence about the possibility
of the elimination of major differences between national and international standards 13, but
this confidence leaves something to be desired for the reasons that follow. The Norwalk
Agreement leaves room for the possibility that US standards will remain independent and
separate from international accounting standards14. The term ―fully compatible‖ implies the
ability of two sets of standards to coexist, but this does not necessarily mean that the two
sets of standards are the same in all aspects. This can be contrasted with the E.U.,
Australian, and New Zealand position that is essentially the unmodified ―adoption‖ of
IFRSs as their ―benchmark‖ for regional GAAPs (De Lange and Howieson, 2006).
The Norwalk Agreement, as well as the great majority of commentary about it, also refers
to ―convergence‖ but this too does not necessarily mean that a single set of accounting
standards will be the outcome of the co-operation between the FASB and the IASB.

―Convergence‖ implies moving towards each other, not necessarily being the same.
Moreover, the SEC explained that it will accept convergence only if the best result will be
the logical outcome and not a levelling off to satisfy the lowest common denominator. It will
do its best to avoid that a competition among different regulatory systems could lead to a
―race to the bottom‖ (Dye and Sunder, 2001). The recent announcement that the SEC will
allow non-US companies to use IFRSs15 refers to ―full IFRSs‖, rather than EU-endorsed
IFRSs: if these last ones are different, this would be problematical for EU-based foreign
private issuers. Besides, the SEC will not disappear as a body of accounting regulation
since it will keep its authority, being the natural body to interpret IFRSs.
It is well to remember that the IASB standards are principle-based and so they allow a
significant discretion in application and this could impair the utility of the harmonization
effort (Benston et al., 2006; Buchanan, 2003; Schultz and Lopez, 2001). Every company,
in fact, is expected to find an accounting solution that could be consistent with other local
rules (i.e. taxation, credit, etc.) and to get some benefit from it. Therefore, some firms
could suffer negative effects from adopting non-local GAAP if they have shielded
themselves from some local financial or market threats through careful use of their existing
accounting standards. The risk of a local firm that turns to international GAAP is that it
could experience a decrease in domestic trading and in price informativeness (Barth,
Clinch, Shibano, 1999, p. 225). It follows that, given the international standard as less
stringent than US GAAPs, it could place American companies at a disadvantage in
competing for access to international capital markets and, at the same time, foreign
companies at an advantage because they can access US capital markets without full US
GAAPs compliance16. Besides, US‘s accounting regulators have given signals that they
intend to adopt IFRSs, but it is not clear if they really want these international accounting
standards. On the other side, non-US countries usually see advantages in using IFRSs,
compared to other national GAAP, such as access to capital markets of other countries,
lower interest costs and lower information production costs.
Given that the US is characterized as being the world‘s largest capital market, there would
be little advantages for US firms to go to other countries simply to raise capitals. Similarly,
it is unlikely that interest costs in the US would fall by the adoption of IFRSs because US
investors are quite well informed given the extensive and detailed reporting required by the
FASB and SEC regulations (more so after Sarbanes-Oxley Act of 2002). It is certainly true
that a universal set of accounting standards would of course reduce information production
costs also of US MNE‘s, but this does not lead directly to the necessity of adopting IFRSs
for a country such as the US which sees itself as holding privileged position and role in
international affairs17 (De Lange and Howieson, 2006). Therefore, significant obstacles to
the adoption of IFRSs as a replacement for US GAAPs still remain. For instance, now that
the reconciliation requirement has gone, for this reason, the IASB could no longer need to
continue converging with US GAAPs and the IASB would need to consider US GAAPs, but
no more than any other national GAAPs (Holgate, 2007). Other obstacles include:
        the FASB‘s position as a national standard setter in respect to the IASB;
        the conflict among regulatory authorities within the US;
        the existence of US foreign policy that reflects its peculiarities that make US feeling
       noticeably different in its relationship with other nations and supranational
       institutions18 in a way to justify its own stance.
Regarding the first topic, the FASB represents a significant number of producers, users,
and attesters of financial reports compared with other parties associated with the IASB. It
follows that the FASB19 has a certain degree of power in the international standard setting
process by exerting its influence towards international regulations. Even the IASB has
used the FASB standards, in several occasions, as a basis for its own rules (Imhoff, 2003).
This could not lead to a real convergence process, given the necessity of changes in both
the US and the international standards and the fact that the US standards are not always
superior to international standards (Hague, 2006).
Regarding the second topic, the conflict among the US‘s regulatory authorities 20, the
adoption of IFRSs in the US depends not only on the relationship between the FASB and
the IASB, but also on the management of power of competing regulatory entities within the
US21 itself (Walker and Robinson, 1994). Since the FASB has not the enforcement power
of its standards, it could have significant difficulties in managing inter-organizational
conflicts. Moreover, the Sarbanes-Oxley Act has made the FASB more vulnerable to
political pressure regarding its annual budget that at present could be managed, even if
indirectly, by the SEC. Therefore, the SEC has the power to address its accounting
policies that could not necessarily be coherent with what the FASB expects. Besides, The
IASB‘s agenda is subject not only to the influence of the FASB but also to the lobbying
power exerted by a multitude of corporations, national standard setters, governments, and
national authorities for markets regulation. Thus, the room for a conflict is wide and
decisions addressed by the IASB result from such a ―political process‖ (Zeff, 2002).
Regarding the last topic, it is possible to add that a comparison between US and EU
concepts of sovereignty shows the reasons why the members of the EU tend to be more
predisposed to accept limits on their sovereignty for the greater good of the EU as
opposed to the US which has been reticent to allow itself to be restricted by international
treaties and agreements (Keohane, 2002).
In regard to the IASB, it is possible to observe that it is not insulated from political
pressures and such influences pose a significant risk to the IASB‘s authority and
legitimacy and to its ability to successfully achieve convergence with the FASB. On the
other hand, the FASB has to face similar difficulties, as argued later in this paper. Given
that politicians have the ultimate power, any standard-setter has not the power needed to
exert supreme judgment. Governments and politicians of any persuasion always can
assert the ―public interest‖ also in the field of accounting concepts and arguments. The
convergence process could also be disturbed by other sources of potential conflicts such
as new economic blocs (especially from the Asian area). Recently, for instance, the FASB
and the China Accounting Standards Committee (CASC) have issued a memorandum of
understanding (MOU) articulating their commitment to strengthen co-operation and
communications between the two standard-setting organizations22. Therefore, the IASB
and the FASB face significant challenges in trying to manage the competing stakes of
various lobbying groups and at the same time attempting to achieve convergence.
It is well to underline that the US supports its ―exceptionalism‖ being the world‘s largest
market and thus considering the superiority of its accounting rules and regulations in
opposition to other national or international accounting standards. It follows that US‘s
regulating agencies will not accept easily a co-operative model of ―pooled sovereignty‖
(Keohane, 2002) typical of the EU, but its claim of superiority in accounting standard
setting has been weakened by the recent corporate scandals that have raised the debate
over principles- versus rules-based accounting standards. Corporate debacle, ―though
having drawn great attention in the IFRS dialogue, is not an indicator of any fundamental
accounting or regulatory system failure. Rather, it is a case of corrupt management that
was seeking technicalities behind which to perpetrate investor fraud‖ 23 (Buchanan, 2003,
p. 66). Therefore, given that corporate collapses occur regularly in all jurisdictions and
forms of accounting standards, the US‘s effort to modify its standards will be short-lived as
the practical and cultural implications of ceding sovereignty to a ―foreign‖ rule-maker are
recognized in the US (Keohane, 2002). Moreover, the existence of a memorandum of
understanding between the IASB and the FASB highlights that there is no other national
standard setter which enjoy such direct input into the operation of the IASB.

6. The stock options accounting case and its evolution path: some considerations
   on external influences

The use of stock option as a remuneration system and its accounting method have
represented one of the most debated and controversial issues during the last decades and
their regulation path is one of the most representative examples of lobbying activity toward
the standard setters. The recognition of stock option plans as a cost is a recent outcome of
a long debate between standard-setter bodies and industrial associations. The process
that led to the issue of the IFRS 2 and of the SFAS 123R, the two standards both requiring
the expense of stock options, has been very complicated. It could be useful to report each
step of that process in the Table 1.

                    Table 1. The evolution paths of IFRS 2 and SFAS 123R
Date                 Event
1972                 Issue of APB Op. no. 25
1984 – 1988          First debate on changing FASB Std
1991 – 1995          Second debate
1995                 Issue of SFAS 123, (with no substantial changes from APB no. 25)
2001                 Born of IASB and start of IASB debate on Stock Options
2002                 IASB ED on Share Based Payments and start of a new FASB debate
February 2004        Issue of IFRS 2
December 2004        Issue of SFAS 123R

Each of these steps is the outcome of a long discussion among the different stakeholders,
in particular the US big companies, the accounting firms and the Congress.
From the issue of the APB no. 25 24, the discussion has never come to an end: from 1982
to 1988, during the first debate, FASB, together with a task force appointed by AICPA,
studied the issue and after this the FASB declined to change the rule adopted. This
process was influenced by a strong lobbying campaign of the US companies, deriving by
the great development of stock-options as executives and employees compensation: this
could be considered as the first era of expansion of share based compensation, aided by
the favorable accounting rule25.
The expansion of stock options was not so appreciated, because this kind of
compensation could hide an excess of personnel costs26: in effect, senator Levin in 1991
requested a sort of revision of the FASB principle, introducing the ―Corporate Executives
Stock Option Accountability Act‖ that would have required the FASB to issue a standard
charging options to earnings. As a consequence of this interest, on April 8, 1993 the FASB
voted to require that the estimated value of employee stock options would have been
recognized as an expense. An Exposure Draft has been issued on June 30, 1993. This
Exposure Draft required that the fair value of stock options should have been measured at
the time the options were granted 27.
After the FASB issued the ED, there was a second lobbying campaign, carried out in
1992-1995 by the six major accounting firms, the start-up companies, the industry
associations, the SEC commissioners and some members of the Congress, in order to
fiercely react to the expense at the fair value requirement. Prominent members of Senate
and the House were pressured to introduce a series of rules to frustrate any attempt of the

FASB to move ahead with its proposal28. At the end, ―under the gun from key members of
the Congress, the FASB could do no more than issuing the SFAS No. 123: Accounting for
Stock-Based Compensation, by a 5-2 vote, requiring footnote disclosure of estimated
dilutive effect of stock options on reported earnings‖ (Zeff, 2002).
When the IASB started in 2001 the discussion for the stock options accounting, the
oppositions to the announced prevision of expensing stock options at the fair value were
stronger than ever, especially from the Financial Executive International and the Business
Roundtable bodies, both composed by the CFOs of main US companies. Phil Ameen, the
former comptroller of General Electric Company, said that the IASB‘s decision ―if
sustained, will portend a quick erosion of corporate participation and support‖ for the IASB
itself. Although these oppositions, the IASB issued in November 2002 its ED on Share-
Based Payment, which proposed the expensing of stock-based compensation at its fair
In March 2003, the FASB announced it would have re-examined whether stock options
should have been a charge against earnings. The chairman of the FASB, Robert Hertz, in
this occasion, affirmed that ―an expense treatment would be consistent with the FASB‘s
commitment to work toward convergence between US and international accounting
standards‖. The ―Big Four‖ accounting firms submitted their comments to the IASB‘s
proposal to expense employee stock options: the general response was lightly oriented to
accept it, concerning only about the capability of the option pricing models to measure the
fair value of stock options. The SEC did not take any position in regards to this problem,
while the Congress was divided between who opposed to the mandatory expensing of
stock options and who urged mandatory expensing of them. The issue of the SFAS 123R
in December 2004 followed the IFRS 2 issue in February of the same year, both
containing the prevision of mandatory expensing of stock option at fair value. At a first
glance it seems to be a rare case of convergence between the two bodies, with the FASB
respecting the IASB‘s choices29: but the analysis is more complicated, in particular with
regards to the ―strange‖ change of mind of the economic powers of the US society, that
previously influenced the FASB‘s decision on the issue with their activity.

7. The influence of lobbying powers in the stock-options accounting case

At this point of the analysis, the main question regards what happened in the years after
2002 to the fierce opposition of the US companies that in the first half of the nineties led to
the SFAS 123 and to its not mandatory expensing of stock options. In that case, the letters
opposing the new rule were in an overwhelming amount, about 1,700, including formal
letters from the major accounting firms, the venture capitalists, the big US companies and
even some members of the Congress (Dechow, Hutton, Sloan, 1996). Against the first
announcement of the IASB there was a general opposition as well, but after 2002 all this
opponents seemed to disappear. In effect, it was the approach of the US companies to the
matter that changed: the SFAS 123 issued in 1995 permitted a voluntary recognition of
stock options expenses by the firms, but until 2002 just a handful of firms had chosen to do
so. After the summer of 2002 and the financial scandals of that period, dozens of firms
began to announce their intention to recognize the SFAS 123 expenses voluntarily.
Therefore, it could be said that the earthquake of Enron and Worldcom scandals
influenced also the firms‘ choices about this issue.
These accounting scandals have revealed just how unreal was the economic situation that
many companies have been painting in their financial statements. In particular, investors
and regulators have come to recognize that option-based compensation was a major
distorting factor: if AOL Time Warner in 2001 would have reported employee stock option

expenses as recommended by the SFAS 123, it would have shown an operating loss of
about 1.7 billion dollars rather than 700 million dollars in operating income it reported
(Bodie, Kaplan, Merton, 2003). Thus, from 2002, the majority of big US companies started
to recognize stock option expenses, substantially with the attempt to improve financial
communication. Recognition of SFAS 123 expenses is a conservative accounting choice
(Aboody, Barth, Kasznik, 2004) because it unambiguously lowers the net income
compared to the earnings in the simple disclosure case. Moreover, the SFAS 123
expense-recognition choice is irreversible, because firms choosing to recognize stock
option expenses may not return to simply disclosing the expenses.
In effect, as a result of the crisis of equity market, investors focused on the quality of
earnings and, as a consequence of this, firms started to understand the potential benefits
of being perceived as having higher quality earnings, that means, in particular, more
transparent earnings. For example, Warren Buffet, CEO of Berkshire Hathaway Inc.,
affirmed that firms that recognize the SFAS 123 expenses will ―develop a reputation for
being believable, for not hyping things, and will be valued more than those whose CEO is
flim-flamming [investors]‖ (Borrus et al., 2002). Moreover, during that period the market
participants started to believe that recognizing stock options expenses could be a signal of
higher quality earnings. To many corporate governance experts, less-hyped earnings gave
more confidence and brought back frightened investors. Probably, this is the reason why
companies like Coke reacted by giving the market what it seemed to be demanding: more
transparency30. At the half of February 2004 more than 500 NYSE listed firms recognized
voluntarily the stock option expenses 31.

8. Concluding remarks

In conclusion to the above analysis, the main critical issues in the FASB convergence
project with the IASB (first research question) could be summarized as follow:
    ―convergence‖ implies moving towards each other, not necessarily being the same;
    even if SEC allows non-US companies to use IFRSs, it refers to ―full IFRSs‖ rather
     than EU-endorsed IFRSs;
    IASB standards are principle-based, while US GAAPs are rule-based;
    US is characterized for being already the world‘s largest capital market and this
     supports its ―exceptionalism‖;
    although the FASB is a national standard setter, it seems to have a strong power to
     exert its influence towards the international regulations and bodies (included the
    the adoption of IFRSs in the US depends also on the management of power of
     competing regulatory entities within the US itself;
    the IASB‘s agenda appears to be subjected to the lobbying power exerted by a
     multitude of corporations, national standard setters (included the FASB),
     governments, and national authorities for markets regulation;
    the US and the EU have different concepts of sovereignty and the US is more
     reticent to allow itself to be restricted by international treaties and agreements;
    the convergence process could also be disturbed by other sources of potential
     conflicts such as new economic blocs especially from the Asian area;

At this point, two possible scenarios could occur. In the former, the US continues to keep
its independence, although with some co-operative efforts with the IASB and continues to
set its own standards some of which will significantly differ from IFRSs. In the latter, the
US will adopt IFRSs, but on the basis that it will assume a dominant position in its
membership on the IASB that may allow exerting a political influence (De Lange and
Howieson, 2006). In the first scenario two sets of standards could exist at the same time32
and several conflicts may arise as a result of allowing individual corporations to issue
financial reports prepared in accordance with either the FASB or the IASB standards
independently from their differences (Dye, 2001). It could also lead to a loss of legitimacy
and status of one or both the sets of rules. In the second scenario, ―there is a danger that
some countries or economic blocs will perceive the resulting standards as irrelevant or
inappropriate to their own particular circumstances and institutional systems. Further, the
domination of IFRS by any one group or nation risks the chance of losing important
diversity of inputs that would otherwise encourage the development of more innovative
solutions to accounting problems‖ (De Lange and Howieson, 2006, p. 1029). It follows that
behind a clear commitment of convergence that the FASB and the IASB undersigned,
there are other forces that influence the output of that project (second research question).
The objectives of various parties involved in the standard setting due process often push
to obtain the accounting solution that in a particular point of time could bring the most
benefits to that party and this does not mean that it could be the best solution at all. The
standard issuing process is the result of a lobbying activity and for this reason, especially
in the long term, the convergence project between the FASB and the IASB standards still
remains a great question mark.
The stock option accounting case analysis, then, has demonstrated that, more so, the true
decisions about accounting issues are not undertaken within the standard setters bodies,
but outside, among the big US companies: the change of mind about the stock option
matters followed a process of voluntarily recognition by the main firms and it was not the
result of the discussion started about twenty years before. The possibility for firms to
recognize the SFAS 123 expenses has been available since 1995 with the issue of the
SFAS 123, but, as already said, a few of them decided to do so, maybe because they
perceived that the costs of doing it were higher than any benefits. These benefits
increased during 2002, because the collapse of the stock-compensation-intensive
technology sector and the wave of accounting scandals focused the attention of investors,
regulatory bodies, and standard setters on accounting for stock-based compensation.
During 2002, many stakeholders understood that stock-based compensation resulted in
costs to the firm that had to be appropriately expensed, and they began to seek for the
reasons why firms were not recognizing the SFAS 123 expenses. During the very first
years of the XXI century, the use of employee and executive stock options as a
compensation increased33 and firms could use the SFAS 123 expense recognition as a
signal that they planned to focus on the cost effectiveness of their stock-based
compensation plans and that they believed the benefits associated with their stock-based
compensation would have exceeded the costs. However, if managers had believed that
investors would have perceived expenses recognition as associated with focus on the cost
effectiveness of their stock-based compensation plans, firms would have elected to
recognize it.
Without the financial scandals and the understanding of the benefits deriving by
recognizing stock options expenses, probably the FASB‘s principle would have kept the
same limitations, still permitting the simple footnote disclosure. As a consequence of this,
the convergence between the FASB and the IASB on this issue seems to be less
significant: the FASB‘s choice, even if its chairman said that the FASB was following the
IASB‘s decision, has been addressed more by a strong lobbying power than by a real will
of searching new standards similar to IFRSs. Thanks to a careful examination of the
behaviour of US companies in the years before the issue of the SFAS 123R, it has been
demonstrated that the result reached in regards to this issue has been possible more for a
―concession‖ of these subjects, which has already addressed the application of what was

provided in the new standard version, rather than for the commitment of the FASB toward
the development of a single set of accounting standards worldwide.
At the end, answering to our second research question, it could be said that the above
drawn analysis shows more so how the due process leading to any new standard issuing
is losing its initial scope of assuring the transparency of the process and the satisfaction of
a large amount of constituents, but it is moving under other influences dependent on a
lobbying process. Rather, it is becoming more and more an alibi to hide the lobbying
activity behind it.


    To avoid difficulties in interpretation.
    In order to provide a solution for every kind of operation that a company could face, being able at the same

time to provide an effective system to assess new kind of transactions.
    That means full disclosure and understandability.
    IASB has endorsed in 2001 all 41 accounting standards (International Accounting Standards -IAS-)

formerly issued by IASC and has issued a new series of accounting standards called International Financial

Reporting Standard -IFRS- in order to revise the former ones and to respond to new kind of transactions

observed in the enterprise practices.
    For examples ―the objectives of financial reporting differ across nations: traditionally, the primary objective

of accounting in many continental European nations and in Japan was conformity with the law. In contrast

Canada, the U.K., the Netherlands and many other nations share the U.S. view that the primary objective is

to provide information for investors‖ (KIESO ET AL., 2007, p. 4).
    This phenomenon is known with the term of ―economic consequences‖ (ZEFF, 1978).
    Referring to the case of Enron collapse, Buchanan argues: ―Enron was hiding billions of dollars of debt by

using off-balance-sheet financing. The purpose was to convince the marketplace to pay no attention to the

associated risks‖, (BUCHANAN, 2003, p. 65). FASB also issued a proposal about converting its standard

setting to a principles-based approach in response to recent concerns: ―A principal concern is that

accounting standards, while based on the conceptual framework, have become increasingly detailed and

complex. Many assert that, as a result, it is difficult for accounting professionals to stay current and that

accounting standards are difficult and costly to apply. Many also assert that because much of the detail and

complexity in accounting standards results from rule-driven implementation guidance, the standards allow

financial and accounting engineering to structure transactions ―around‖ the rules, thereby circumventing the

intent and spirit of the standards‖ (FASB, Proposal-Principles-based approach to U.S. standard setting,

    The authors say that ―a generally expressed all-pervasive fundamental concept‖ such as the true and fair

view or the nonmisleadingness principles is essential to provide users with not misleading financial

statement that represents the underlying economics of an enterprise (ALEXANDER and JERMAKOWICZ, 2006, p.

138, p. 161).
     On November 14, 2008, the Security and Exchange Commission released a proposed rule to collect

comments (final deadline: April 20, 2009) about a ―roadmap for the potential use of financial statements

prepared in accordance with International Financial Reporting Standards by U.S. issuers‖. Securities Act

Releases Nos. 33-8982 (November 14, 2008) and 33-9005 (February 3, 2009) available at

http://www.sec.gov/rules/proposed/2008/33-8982fr.pdf        and    http://www.sec.gov/rules/proposed/2009/33-

     ―At the October 2004 joint IASB-FASB meeting, the Boards agreed to add to their respective agendas a

joint project to develop a common conceptual framework—a single framework that both converges and

improves upon the existing frameworks of the two Boards. […]The Boards also agreed that the project

should be divided into phases. Initially, the focus will be on objectives, qualitative characteristics, elements,

recognition, and measurement. The Boards will give priority to addressing issues that are likely to yield

benefits to the Boards in the short term, that is, cross-cutting issues that affect a number of their standards-

level agenda projects‖. Joint Conceptual Framework Project, Financial Accounting Standards Advisory

Council, December 2004.

―The objective of the conceptual framework project, a joint project of the FASB and IASB, is to develop an

improved common conceptual framework that provides a sound foundation for developing future accounting

standards. Such a framework is essential to fulfilling the Boards‘ goal of developing standards that are

principles-based, internally consistent, and internationally converged and that lead to financial reporting that

provides the information capital providers need to make decisions in their capacity as capital providers. The

new framework, which will deal with a wide range of issues, will build on the existing IASB and FASB

frameworks and consider developments subsequent to the issuance of those frameworks‖. Conceptual

Framework – Joint Project of the IASB and FASB, FASB and IASB, 2009.

The project is still ongoing. To see all the milestones and the progresses of the project visit

     On January 4, 2008, the Commission approved the final rule to accept from foreign private issuers

financial statements prepared in accordance with the English language version of IFRS as published by the

IASB without the currently required accompanying reconciliation to U.S. GAAP. ―Acceptance from Foreign

Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting

Standards without Reconciliation to U.S. GAAP‖. Amendments regarding acceptance of financial statements

prepared in accordance with IFRS as issued by the IASB are applicable to financial statements for financial

years ending after November 15, 2007 and interim periods within those years contained in filings made after

the effective date (March 4, 2008). Amendments to General Instruction G of Form 20–F relating to first-time

adopters of IFRS are applicable to filings made after the effective date. Securities Act Release No. 33-8879

(December 21, 2007) available at http://www.sec.gov/rules/final/2008/33-8879fr.pdf
     In particular a difference between Europe and US arises: Europe is more interested in developing a

representative IASB rather than an independent IASB, while US is encouraged to set very detailed standards

in order to face a very litigious society.
     Sir David Tweedie has been interviewed by the Journal of Accountancy (PICKARD G., Simplifying Global

Accounting, Journal of Accountancy, Vol. 204, No. 1, 2007, 36-39).
     Young highlights: ―Members of the Financial Accounting Standards Board (FASB) and its staff are

continuously engaged in a variety of efforts to persuade individuals that the work of this entity is valuable,

appropriate, useful and correct‖. (YOUNG, 2003, p. 621).
        Securities    Act     Release        No.   33-8879    (December       21,     2007)     available     at

     Given that IFRSs are less restrictive according to the principle based approach, however, other studies

support the thesis that IFRSs are a set of financial reporting policies that typically require increased

disclosure and restrict management‘s choices of measurement method and at an empirical level it is possible

to notice a general better ability of financial analysts to forecast firms‘ earnings accurately, a less earnings

management, a more timely loss recognition, and a more value relevance of accounting amounts (BARTH ET

AL.,   2008; ASHBAUGH and PINCUS, 2001). Therefore the main issue in adopting a principle based set of

accounting standards is the cruciality of interpretation of financial reports more than the transparency level


     ―Underlying this debate is a general US concern about the recent losses of business to London. The

reasons for this lie at least partly in the heavy regulatory hand that New York places on US-listed companies.

This comprises Sarbox and much else - not just US GAAP. It also lies in the threat of litigation - and a

change in accounting standards will only scratch the surface of this. But the US authorities need to explore

every opportunity to peel back the complexity of requirements if the US is to stem to eastwards tide. This is

perhaps the proper context in which to view the SEC's announcement‖ (HOLGATE, 2007, p. 85).
     This phenomenon is widely known as American Exceptionalism: ―exceptional‖ in this context does not

mean that the U.S. ―is better than other countries or has a superior culture‖ but rather that ―it is qualitatively

different from all other countries‖ (LIPSET, 1996, p.18).
     This power of influence descends from the so called ―American hegemony‖ (NYE, 2002-2003, p. 555) in

international affairs built through a combination of hard (military and economic) and soft (culture and values)

     Four organizations are instrumental in the development of financial accounting standards in the United

States (KIESO    ET AL.,   2007, p. 6): 1) Securities and Exchange Commission (SEC); 2) American Institute of

Certified Public Accountants (AICPA); 3) Financial Accounting Standards Board (FASB); 4) Government

Accounting Standards Board (GASB). The hierarchy displaying the sources and levels of authority of US

GAAP is called the ―House of GAAP‖ (KIESO ET AL., 2007, p. 12).
     ―The political process associated with the development of accounting rules not only involves the efforts of

interested parties seeking to secure the content of rules favourable to their interests but also the behaviours

of regulatory agencies as they compete to influence or control the regulatory ‗agenda‘. Regulatory agencies

develop their own agendas, in light of their own perceived priorities and the regulatory initiatives of other

agencies. The placing of an accounting issue on the agenda of one agency may be warmly supported by

other agencies or, alternatively, be viewed as a threat to the regulatory ambitions of those other agencies‖

(W ALKER and ROBINSON, 1994, p. 119).
     FASB Chairman Robert Herz and Liu Yuting, member of the CASC and Director-General of the

Accounting Regulatory Department of the Ministry of Finance, signed the MOU at an 18 April 2008 meeting

held at the FASB headquarters in Norwalk, Connecticut. As a result of the meeting, the organizations

expressed the following in the MOU: the FASB and the CASC will enhance communication and improve

understanding in terms of technical issues to facilitate economic interaction between the two countries; the

FASB and the CASC will facilitate the exchange of experience of accounting standard setting,

implementation, and international convergence between the two countries, including inviting each other to

significant accounting standards seminars, reciprocal visits, etc.; the FASB and the CASC will strive to

exchange opinions regularly and build the technical foundation for sharing views on convergence of

accounting standards.
     ―It appears that its primary infraction, nondisclosure of off-balance sheet financing, might be more clearly

prohibited under IFRS. That, however, would not necessarily have precluded them from other fraudulent

tactics under the international system, because the IFRS is generally less structured than US GAAP and

more interpretive latitude is available to corporate accountants‖ (BUCHANAN, 2003, p. 66).
     According to this document, for the first time the stock based compensations are considered as expenses

and measured at their intrinsic value – that is the difference between the share price and the option exercise

price – on the date both the number of options granted and the exercise price are known (for fixed plans,

generally, this was the grant date). For most firms, stock based compensation expense under the APB no.

25 equals zero because most firms grant employee stock options with a fixed exercise price that equals the

stock price at the date of grant. The publication of the Black-Scholes formula (BLACK       AND   SCHOLES, 1973)

triggered a huge boom in markets for publicly traded options24. This movement was reinforced by the

opening of the Chicago Board Options Exchange in 1973. It became clear soon that the stock options were

worth far more than the intrinsic value defined by the APB no. 25 (BODIE, KAPLAN, MERTON, 2003).
     After its Invitation to comment: Accounting for Compensation Plan Involving Certain Rights Granted to

Employees. issued on May 1984 and during its research (1985-1988) on determining the applicability of

various stock option models to employee stock options, FASB received more than 200, mainly disagreeing

with the FASB‘s views, but the Board unanimously agreed that employee stock options resulted in a

compensation cost. Neverthless, at that time the real point of disagreement among members was about the

distinction between liabilities and equities and the effect of this on stock option: in 1988, this led the FASB to

set aside work on stock compensation and to focus on the broader question of how to distinguish liabilities

from equities.
     Top executive compensation was criticized for being ―excessive‖ and ―not linked to performance‖

(CRYSTAL, 1992)
     Thus, at the grant date the firm recognized an asset (prepaid compensation, which is equal to the fair

value of the option) and an equity (outstanding option), with the asset expensed to earnings over the vesting

period. In this way firms were obliged to recognize an expense that would never have been previously

recognized and the standard would have had the effect of permanently reduce income and retained

     At one point, the Senate passed a resolution urging the FASB not to proceed with its initiative, citing

―grave economic consequences particularly for business in new-growth sectors which rely heavily on

employee entrepreneurship‖ (ZEFF, 2002).
     In particular, the FASB outlined the goal of developing a standard that would converge with that of the

IASB, resulting in a common set of ―high-quality accounting standards‖ (FASB 2004).
     If Coke had expensed options in 2001, earnings-per-share would have dropped by only nine cents to

$1.51 from $1.60. Because Coke is not a big user of options, it is relatively easy for the soft-drink company

to look bold and make the switch. Indeed, stock option grants represent only about 1.8% of Coke‘s 2.5 billion

shares outstanding. Other consumer goods, manufacturing, and retail companies, hoping for a reward from

investors, may follow Coke‘s lead. ―It gives the company a good image in the investment community,‖ says

Tim Drake, Senior Equity Analyst for Banc One Investment Management, which owns 8.4 million Coke

shares. Coke‘s share price rose 95 cents, to close at $52 on July 15, after its announcement.
     As reported in the December 17, 2004, Bear Stearns & Co. report about companies that currently expense

or intend to expense stock options using the fair value method.
     This scenario descends from the Concept Release on ―Roadmap for the potential use of financial

statements prepared in accordance with international financial reporting standards by U.S. issuers‖

(November 14, 2008) (available at http://www.sec.gov/rules/concept/2007/33-8831a.pdf ) as request for

comments. ―This Roadmap sets forth several milestones that, if achieved, could lead to the required use of

IFRS by U.S. issuers in 2014 if the Commission believes it to be in the public interest and for the protection

of investors. This Roadmap also includes discussion of various areas of consideration for market participants

related to the eventual use of IFRS in the United States‖.
     In early 2000, Apple‘s Board Directors awarded Steve Jobs ten million stock options valued at more than

400 million of dollars and didn‘t charge this amount against income.


Aboody D., Barth M.E. and Kasznik R. 2004. ―Firms‘ Voluntary Recognition of Stock-
   Based Compensation Expense, Journal of Accounting Research‖, 42(2), pp. 123-150.

APB (1972) APB Opinion No. 25, Accounting for Stock Issued to Employees.
Alexander D. and Jermakowicz E. 2006. ―A True and Fair View of the Principles/Rules
    Debate, Abacus‖, 42(2), 2006, pp. 132-164.
American Accounting Association 2004. Financial Accounting Standard Committee,
    Evaluation of the IASB‘s Proposed Accounting and Disclosure Requirements for
    Share-Based Payment, Accounting Horizons, 18(1), pp. 65-76.
American Accounting Association 2005. ―Response to the FASB‘s Exposure Draft on
    Share-Based Payment: An Amendment of FASB Statements No. 123 and No. 95,
    Accounting Horizons‖, 19(2), pp. 101-114.
Ampofo A.A. and Sellani R.J. 2005. ―Examining the differences between United States
    Generally Accepted Accounting Principles (U.S. GAAP) and International Accounting
    Standards (IAS): implications for the harmonization of accounting standards,
    Accounting Forum‖, 29(2), pp. 219-231.
Arnold P.J. and Sikka P. 2001. ―Globalization and the state-profession relationship: the
    case of the Bank of Credit and Commerce International, Accounting, Organizations
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