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

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 SarbanesOxley 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. 

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 ShareBased 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. 
Page 2

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. 

David M. Walker 

Comptroller General 

of the United States