FASB Approves Expensing of Stock Options

The debate on mandatory expensing of stock options moved center stage last week when the Financial Accounting Standards Board (FASB) voted unanimously to require companies to expense employee stock options. It could take up to a year before the final draft is released with the new rule taking effect sometime in 2004. In 1994 the board considered adopting the expensing method but encountered resistance from corporate groups as well as Congressional members. It seems likely that will happen again.

Last month, 15 U.S. Senators sent a comment letter saying that FASB’s decision-making process is "fundamentally flawed." The legislators asked the board to reconsider its position, arguing that expensing stock options would give investors inaccurate information.

Another critic of expensing is the International Employee Stock Options Coalition (IESOC), a coalition of trade associations and companies, including Financial Executives International, NASDAQ, and the National Association of Manufacturers. IESOC says that FASB is making a "rush to judgment," and has failed to consider alternative approaches. IESOC contends that a switch to expensing will hurt U.S. innovation and entrepreneurship.

Over the years, one of the most vocal opponents to expensing options has been the high-tech industry, which relies on generous stock option plans to attract and retain workers. But even that industry is feeling heat from investors. On April 24, Apple Computer shareholders approved a non-binding proposal to have the company expense options. It’s the first high-tech company to pass such a measure in Silicon Valley.

The debate on stock options isn’t just focused in the United States. Last July, the International Accounting Standards Board voted to publish an exposure draft of a proposed international accounting standard that would require the expensing of stock options. A month later, FASB agreed to consider changing the method of accounting for stock options.

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