FASB Grapples With Valuation of Stock Options

How to place a value on stock options is just one of the issues the Financial Accounting Standards Board (FASB) is challenged with as it moved this week to allow companies to reverse stock option expenses on their financial statements when an employee later gives up the options.

The Board is working to develop new stock option accounting rules. Most of corporate America is deeply concerned and adamantly opposed to the Board’s move last month to require the expensing of options. Expensing stock options cuts into profits and corporations have fought the wave to make it a requirement.

The Board decided this week to allow the companies to reverse the expense on their books when employees forfeit their options. The biggest task FASB now faces is deciding how to place a value on the options and how they should be reflected in financial statements.

FASB, which establishes U.S. accounting standards, has struggled with the demand for more conservative accounting rules in the wake of recent corporate scandals.

Options are a big part of employee compensation packages and are often liberally distributed, especially by technology firms. The technology industry has been most vociferous in its objection to the expensing of options.
Texas Instruments Chief Executive Tom Engibous recently told a group of analysts that he had seen no good way to place a value on stock options.

"I think it's going to push us to a cash flow accounting way of doing things because I think it's almost a ludicrous way of doing things," Engibous said, adding that his company would certainly adhere to any new rules the Board sets.

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