FASB Will Allow Companies to Decide How to Value Stock Options

The Financial Accounting Standards Board (FASB) took a big step toward finalizing a rule on expensing stock options Wednesday by agreeing to let companies choose their own method for calculating value.

FASB had previously singled out one approach as the preferred method for estimating the fair value of stock options. According to the Wall Street Journal, the approach uses a “binomial tree” or “lattice” model, which is considered “more refined” than another method called the Black-Scholes model.

Companies, however, did not want to be bound by one particular method of valuation and told FASB so. Companies commented that they could look at all available models and assess for themselves the costs and benefits of each.

FASB agreed Wednesday, saying that it would not indicate in its final statement that it preferred one model over another.

Accounting analysts say that companies may use the binomial approach anyway.

"Many companies have already started moving toward the binomial approach as a result of watching the FASB deliberation process over the last several months," said accounting analyst Dane Mott at Bear Stearns. "As more and more companies start to make the switch, investors are going to question the companies who are not," he added.

FASB has not yet discussed whether implementation of the expensing rule should be delayed, an idea that has been suggested by Donald Nicolaisen, the Securities and Exchange Commission's chief accountant. As it stands now, the options expensing rule would become mandatory starting in 2005.

Nicolaisen supports giving companies more preparation time because they are already busy complying with the new internal control requirements of the Sarbanes-Oxley Act.

"My strong preference is to keep the focus on the internal control work, to get that done and to get it done right," Nicolaisen told the Journal Wednesday.

Even if FASB does not cite preference for one model over another, Nicolaisen said, "many companies will still want to use the lattice model." A delay would help some companies make the change.

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