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Practice Management > Compensation and Fees

FASB Issues Draft of New Rule on Stock Options

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NORWALK, Conn. (–The Financial Accounting Standards Board issued an exposure draft of an amendment to Statement of Financial Accounting Standard 123, “Accounting for Stock-Based Compensation – Transition and Disclosure.”

SFAS, adopted in late 1995 after sometimes rancorous debate, urged but did not require that compensation costs arising in connection with options granted to employees be measured and reported in the issuer’s income statement.

The exposure draft still would not go so far as to require such expensing (what it calls the fair-value system). But it would require more prominent disclosures about the method of accounting for stock-based employee compensation and would affect the method adopted on both annual and interim financial statements. It would also provide three methods of transition for companies that voluntarily agree to report the effects of such compensation in their financials.

The comment period will conclude on Nov. 4, 2002. The FASB plans to issue the amendment by the end of this year, and its provisions will be effective immediately upon issuance, with the proposed disclosures to be provided in annual financial statements for fiscal years ending after Dec. 15, 2002.

The draft amendment has come about because some companies, considering a switch to the fair-value system, have expressed concern about the ramp-up effect, i.e., inconsistencies that will occur in their statements from one reporting period to the next if they account for options as expenses in the latter but not the former.

The FASB proposes to give companies a choice: ?They can recognize stock compensation as an expense beginning with awards granted after the beginning of the new fiscal year; ?They can recognize such costs for the year of the change “as if the fair-value-based accounting method in this statement had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after Dec. 15, 1994;” ?Or they can restate all periods presented such costs as expenses in every year back to Dec. 15, 1994, again as if those methods had been used consistently throughout.

In other words, they can build their own ramp, they can “report the full effect of employee stock options in their financial statements immediately upon adoption” or they can adopt either of two systems of phasing-in that effect.

One factor driving the FASB to push corporations toward fair-value expensing is its desire for convergence with the International Accounting Standards Board, which is expected to issue a proposed standard requiring the expensing of stock-option compensation within the month, the board said. The issue has reached new levels of visibility since this spring, when Alan Greenspan, chairman of the Federal Reserve, announced his view that “at least some of the unsustainable euphoria that surrounded dot-com investing at its peak may have been exacerbated” by the practice of giving stock options as a major factor in compensation, without any expensing for that on the income statements, a practice prevalent especially in the high-tech industries.


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