FASB Options Rules Also Affect Private Firms

Late in 2004, the Financial Accounting Standards Board (FASB) issued a controversial ruling regarding how companies list outstanding options as expenses on their books. The impact of the new guidelines on public companies, which goes into effect in June, has attracted most of the attention. Private companies, however, are just as likely to feel the effects of the ruling when the guidelines go into effect for them in December.

Private firms many of whom rely on offering stock options may in fact feel the effects more profoundly because expensing options is far from a common practice among private firms. Expensing options will have at least two significant effects on private firms.

Stock in privately held companies is not publicly traded. It will be up to accountants to determine the real value of a stock option is using a mathematical pricing model. Two popular pricing models are Black-Scholes and indexing of similar publicly traded companies.

Joseph Rich, a compensation specialist with Pearl Meyers and Partners of Marlborough, MA told TheStreet.com that expensing options will reduce a firm’s reported profits overnight and could inevitably push some businesses from the black into the red. This, in turn, could frighten potential investors away. Of course, if large corporations limit their use of options, smaller firms willing to offer stock options to employees, may be able to lure brighter talents away from the larger firms.

You may like these other stories...

Majority of House of Representatives urges leadership to preserve cash method of accounting for tax purposesA bipartisan majority of the House of Representatives – 233 members – has signed a letter urging House...
Munger defends Buffett’s dealCharles Munger defended recent decisions by his business partner, Berkshire Hathaway Inc. Chairman Warren Buffett, and predicted that Berkshire would grow robustly, Jason Zweig of the Wall...
Tax friendly trusts swell under new rulesUS companies are latching onto an obscure real estate provision to avoid corporate taxes, widely adopting a financial maneuver that has been expanded under the Obama administration,...

Already a member? log in here.

Upcoming CPE Webinars

Sep 18
In this course, Amber Setter will shine the light on different types of leadership behavior- an integral part of everyone's career.
Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.