FASB Issues Proposed Stock Option Rule

As expected, the Financial Accounting Standards Board moved yesterday to require employee stock option pay be shown as an expense on company financial statements, beginning next year, the Wall Street Journal reported.

FASB has debated the issue for two years and the exposure draft issued yesterday was long awaited. Stock options, which give employees the right to buy company stock at a fixed price within a certain time period, have never been regulated or recognized as a company expense. They are reflected in the footnotes of the company’s financial statements. Some believe the lack of restriction on options has led to the out-of-control corporate compensation packages some top executives have received in recent years. The changes, if approved, would bring FASB rules into line with the International Accounting Standards Board’s recently adopted rules.

Opponents to the move see it as a blow to rank and file workers, who often receive less cash and more stock options, which can make their jobs more lucrative while creating a potential expense for the company when it has to buy back options to keep the stock from becoming diluted.

"The proposal related by FASB today might as well be renamed the Jobs Export Act of 2004," John Doerr, general partner at Kleiner Perkins Caufield & Byers, a prominent Silicon Valley venture-capital firm, told the Journal. "FASB is charting a course that will hurt rank-and-file workers, give other countries a competitive edge and move jobs overseas in cutting edge industries."

Despite several bills pending on the issue in Congress, none is likely to derail the FASB’s proposal since it would fall to the Senate Banking Committee to act on the matter. Its chairman, Sen. Richard Shelby (R-AL), has said he would stop any attempt to override FASB’s proposed rule, his spokesman told the Journal.

The Journal reported that by using Standard & Poor's, earnings for companies within the S&P 500-stock index would have been 10.6% lower in 2003, 19.2% lower in 2002 and 21.5% lower in 2001 if all the component companies had treated options as an expense.

Analysts predict the rule change would have a far-reaching affect on how companies use options, how many they issue and how they value them, the Journal reported.

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