New Accounting Standard Detrimental to Biotechnology Industry
WASHINGTON, D.C. (December 16, 2004) -- The Financial Accounting Standards Board (FASB) finalized a rule requiring companies to expense all employee stock options beginning June 15, 2005.
“The rule is expected to be particularly harmful to the biotechnology industry, which primarily consists of small, entrepreneurial companies that do not have products on the market. Many biotech firms use stock options to leverage tight payroll budgets and attract the world’s best and brightest scientists and technicians and to retain them through the product development cycle,” said Morrie Ruffin, BIO’s vice president of business development and emerging companies.
“FASB’s new standard, which requires the use of flawed valuation models, will be particularly burdensome to our industry and could result in delays in the development of breakthrough products for diseases such as cancer, diabetes, Parkinson’s, Alzheimer’s and many other life threatening disorders. This will divert much needed money away from research toward the development of extraordinarily complex and highly subjective stock option valuation exercises that none of the experienced investors in the industry will even consider in their investment decisions.”
A survey conducted by BIO in November revealed that the expensing of stock options would not materially affect investment decisions among the most experienced biotech industry institutional investors. In fact, many of the survey respondents said it likely would make decisions more difficult for less experienced investors.
“We strongly urge the SEC to intervene and consider extending the implementation date to the end of the year or later. We also urge them to allow use of alternative models that will provide a more fair and accurate estimate of the value of options for small- and mid-sized companies.
“The flawed methodologies recommended by the FASB will result in option expense estimates that can vary as much as 100 percent depending on the projected volatility of the stock,” Ruffin added.
Furthermore, BIO and other organizations believe FASB approved the standard without considering stakeholder opposition.
The House of Representatives passed a bill last summer that would override the FASB plan, requiring expensing of only the options for the top five officers of each publicly traded company. While the Senate did not act on the bill, 53 senators requested that SEC Chairman William Donaldson devote more time and resources to studying and field-testing various other valuation models.
According to the International Employee Stock Options Coalition, of which BIO is a member, the new accounting practice will harm 14 million American employees who receive stock options, 89 percent of whom are not managers.
BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states and 33 other nations. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology products.