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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Open Roundtable Discussion with Respondents to the Financial Accounting Standards Board Exposure Draft, Share-Based Payment


Donald T. Nicolaisen

Chief Accountant
U.S. Securities and Exchange Commission

Thursday, June 24
Palo Alto, California

I look forward to listening carefully to the comments made at today's roundtables as well as at meetings the FASB has scheduled for later this month in Connecticut. I am particularly pleased that the FASB's first roundtable is taking place in the Silicon Valley - the center of many important technological innovations in the last three decades and an area that epitomizes American entrepreneurialism.

Before I continue, let me make the usual SEC disclaimer. My remarks today reflect my own personal views, and do not necessarily represent the views of my colleagues or of the Commission. I should also mention that I am here, not as a participant, but as an observer of the process.

The Financial Accounting Standards Board's exposure draft on accounting for employee stock options has engendered much debate. People of integrity and intellect on all sides of this debate have invested time and energy in understanding the issues, and it is imperative that the FASB consider all responsible views before issuing a final standard. I am a strong proponent of such debate because I firmly believe that it ultimately leads to better accounting standards, and I believe that will be the case for this particular standard as well.

By following its process, the FASB establishes standards that result in companies providing relevant and reliable information to the investing public. Such information, and confidence in the underlying accounting standards, is essential to the effective functioning of our capital markets. The FASB process involves extensive consultation, public meetings, open discussion such as is expected today, written input on proposed standards, and public re-deliberation before issuing a final standard. In light of this process and the way in which the FASB is funded and organized, the FASB is the only private sector body recognized by the SEC under the Sarbanes-Oxley Act as meeting the criteria necessary to set accounting standards in the United States. I support the FASB's process as the right mechanism for considering this critical proposal.

It is important to me as the Chief Accountant of the SEC that the FASB operate in an unbiased manner and that any final standard is within an acceptable range of alternatives that serve the public interest and protect the investing public. To that end, the SEC staff's oversight includes consulting with the FASB and its staff, reviewing comment letters, and observing open meetings and public hearings. My staff and I have met with many groups that have strong views on all sides of the stock option debate, and I have encouraged the FASB and its staff to do likewise. In addition, I am particularly interested in hearing the views and concerns of representatives from small businesses for whom the cost of implementing new standards is often disproportionately high.

Some of those with whom I have met have expressed concern about the need for appropriate implementation guidance to ensure that any final standard is cost-effective, as well as operational and comparable across companies and industries. While some level of implementation guidance undoubtedly will be provided by the FASB, I am sensitive to concerns about the range of estimates that may be inserted into the models that calculate the fair value of employee stock options. Accordingly, if the FASB issues a final standard, I am committed, as is Alan Beller, Director of the Division of Corporation Finance, that to the extent necessary or appropriate the Office of the Chief Accountant and the Division will work with registrants and auditors to provide guidance regarding acceptable practices for determining estimates of volatility and other factors required by options pricing models, as well as certain other disclosure issues. Furthermore any such guidance would be provided after the final standard is adopted and give registrants sufficient time to implement the standard.

Concerns also have been raised about the effective date of the proposed standard. I am sensitive to this given the potential need for further implementation guidance. Furthermore, I recognize that this year and next year registrants must comply with a host of new regulatory requirements coming from the Sarbanes-Oxley Act, not the least of which is management's assertion on internal control over financial reporting. Registrants and their auditors must be given sufficient time to provide a high level of focus and attention to each of these important new requirements. I believe that anything less will negatively impact investor confidence in our markets.

I look forward to the upcoming discussion, and I continue to encourage interested parties to participate in the standards-setting process. I am confident that the FASB will carefully consider, as will I and others, all relevant comments as they deliberate on the issues addressed in the exposure draft.

Thank you.



Modified: 06/24/2004