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entitled 'Independent Standard-Setting Process for Establishing 
Accounting Standards for Private-Sector Entities' which was released on 
June 28, 2004.

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United States General Accounting Office:

Washington, DC 20548:

Comptroller General of the United States:

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 GAO-04-840R Independent Standard-setting Process Page 2 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.

Signed by:

David M. Walker,

Comptroller General of the United States:

Enclosure:

(194456):

United States General Accounting Office:

Washington, DC 20548:

Comptroller General of the United States:

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.

Signed by:

David M. Walker:

Comptroller General of the United States: