FASB Delays Rule on Stock-Options Expensing
U.S. accounting rule-setters on Wednesday postponed implementation of a requirement that companies expense employee stock options.
The seven-member Financial Accounting Standards Board unanimously agreed to a six-month delay in the options expensing rule — from Jan. 1, 2005 to June 15, 2005. Technology companies, along with Securities and Exchange Commission's top accountant, have promoted a delay.
When FASB proposed mandatory options expensing earlier this year, many companies asked for more time to prepare for the complex new standard considering they were already overwhelmed with new regulations on internal control outlined in the Sarbanes-Oxley Act.
Dow Jones Newswires reported that the expensing rule will take effect with financial statements beginning after June 15, 2005, for publicly traded companies — or the third quarter of next year for those on a calendar year. FASB also agreed that companies will be allowed — though not required — to restate their profits for the first two quarters of 2005 to ease comparisons from quarter to quarter.
FASB Chairman Robert Herz said at the meeting that the board's decision was designed to balance the concerns of companies and auditors with those of investors who want to see the expense recognized "as soon as possible."
But companies that not only wanted a delay, but also a different valuation method, were disappointed by FASB's decisions, CBS MarketWatch reported. The board said the Black-Scholes model and a more complex “binomial” method are the best ways to value stock options. A group of tech companies had suggested a different approach, but the FASB rejected their proposal.
The International Employee Stock Options Coalition, which represents a varied group of companies, said in a statement that FASB "decided to stick with valuation models that are not accurate, reliable, comparable nor auditable."
U.S. Sen. Mike Enzi, R-Wyo., offered qualified praise Wednesday for the group's decision.
"FASB is right to slow down its stock option proposal," Enzi told CBS MarketWatch, "but a delay should occur because FASB is working to test the accuracy of the evaluation formulas, not because it wants to give companies more time to prepare for implementing a flawed proposal."
Enzi is chairman of a Senate subcommittee on securities and investment. The chairman of the Senate Banking Committee, Rep. Richard Shelby, R-Ala., supports the FASB plan and has vowed to block a bill that sharply limits expensing. The House's Stock Option Accounting Reform Act, passed in August, requires expensing only for a company's top five executives. Start-ups are exempt and all other employee options would not be covered by expensing.