FASB Rules that Companies Must Expense Stock Options

In a long-awaited and sure-to-be controversial move, the Financial Accounting Standards Board ruled yesterday that companies have to begin expensing for stock options given to employees as part of compensation packages.

The issuance of Statement 123R represents another important improvement in US generally accepted accounting principles. It will result in more comparable information in financial statements provided to investors, SEC's Donald T. Nicolaisen said in a statement.

FASB, which sets accounting rules for corporate America, said companies will have to begin deducting the value of stock options from their profits next year, the Associated Press reported. Current rules require companies to disclose the options in a financial statement footnote.

Stock options used as an inexpensive compensation perk, in which employees are given options to buy shares of their company's stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference, the AP reported.

Because most companies have to make up the difference in price so the extra shares won't lower the company's earnings per share, advocates like J. Edward Ketz, an associate professor of accounting at The Pennsylvania State University, applaud FASB's move.

"The spending of that precious cash is what in essence makes this whole thing absolutely critical in terms of reporting the truth on what's going on," Ketz told the AP.

The abuse of options by executives at companies such as Enron led the renewed call for FASB to act. At Enron, executives were exercising their options even as they knew the company could implode at any moment.

The technology industry has made particularly heavy use of the stock option perk, with stories of employees at companies such as Microsoft and America Online becoming millionaires by exercising their options. Technology industry representatives signaled Thursday that they intend to fight the measure, which would go into effect with the first annual reporting period after June 15, 2005.

"We need incentives that will help create jobs and foster the development of new products and services," said Bruce Hahn, director of public affairs for the Computing Technology Industry Association, in a prepared statement Thursday.

Congress can override the board's action with legislation. A bill that would require the expensing of options only for the top five executives within a company passed in the House but is stalled in the Senate.

You may like these other stories...

IRS audits less than 1 percent of big partnershipsAccording to an April 17 report from the Government Accountability Office (GAO), the IRS audits fewer than 1 percent of large business partnerships, Stephen Ohlemacher of the...
Is it time to consider a value added tax?Forbes contributor Joseph Thorndike wrote yesterday that he believes the tax reform proposal by House Ways and Means Committee Chairman Dave Camp (R-MI) was dead on arrival. But he...
Read more from Larry Perry here and in the Today's World of Audits archive.The planning phase of an audit engagement of an entity using US GAAP or a special purpose framework will, with minor differences, include similar...

Upcoming CPE Webinars

Apr 22
Is everyone at your organization meeting your client service expectations? Let client service expert, Kristen Rampe, CPA help you establish a reputation of top-tier service in every facet of your firm during this one hour webinar.
Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.