Stock Option Expensing to Become Mandatory in 2005

The Financial Accounting Standards Board met on October 29 to put some of the final touches on its decisions towards mandating expensing of stock options just like any other compensation - an issue which has been steadily gaining momentum for over ten years.

Among the decisions reached by FASB at this week's meeting:

  • Expensing of stock options will become mandatory for companies beginning in 2005.

  • The "modified prospective" approach will be used to expense the options uniformly across all companies - currently there are three different methods allowed which makes it difficult for investors to compare on to the other.

  • The board agreed on the objectives of disclosure of stock option information to help investors better understand the effects of expensing, but has not yet identified specific disclosure requirements.

Currently, most companies still do not expense stock options out of concern for the impact it will have on their profitability. Those companies do, however, need to identify the value of its options in the footnotes of its financial statements.

FASB had previously decided not to mandate any single formula for determining the value of options, leaving companies with a choice of a couple of commonly used methods to choose from.

FASB is expected to propose rules for public comment in early 2004 and issue final rules on stock option expensing in the second half of 2004.

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