In a long-awaited and sure-to-be controversial move, the Financial Accounting Standards Board ruled yesterday that companies have to begin expensing for stock options given to employees as part of compensation packages.
The issuance of Statement 123R represents another important improvement in US generally accepted accounting principles. It will result in more comparable information in financial statements provided to investors, SEC's Donald T. Nicolaisen said in a statement.
FASB, which sets accounting rules for corporate America, said companies will have to begin deducting the value of stock options from their profits next year, the Associated Press reported. Current rules require companies to disclose the options in a financial statement footnote.
Stock options used as an inexpensive compensation perk, in which employees are given options to buy shares of their company's stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference, the AP reported.
Because most companies have to make up the difference in price so the extra shares won't lower the company's earnings per share, advocates like J. Edward Ketz, an associate professor of accounting at The Pennsylvania State University, applaud FASB's move.
"The spending of that precious cash is what in essence makes this whole thing absolutely critical in terms of reporting the truth on what's going on," Ketz told the AP.
The abuse of options by executives at companies such as Enron led the renewed call for FASB to act. At Enron, executives were exercising their options even as they knew the company could implode at any moment.
The technology industry has made particularly heavy use of the stock option perk, with stories of employees at companies such as Microsoft and America Online becoming millionaires by exercising their options. Technology industry representatives signaled Thursday that they intend to fight the measure, which would go into effect with the first annual reporting period after June 15, 2005.
"We need incentives that will help create jobs and foster the development of new products and services," said Bruce Hahn, director of public affairs for the Computing Technology Industry Association, in a prepared statement Thursday.
Congress can override the board's action with legislation. A bill that would require the expensing of options only for the top five executives within a company passed in the House but is stalled in the Senate.