FASB Issues Guidance for Stock Compensation

The Financial Accounting Standards Board has come to the aid of companies who report stock issued to employees. The independent body that sets financial reporting standards for U.S. publicly traded companies, has issued a new guidance that will become effective July 1, 2000. The new guidance is an interpretation of APB Opinion 25 that was first issued in 1972.

Auditors and professionals preparing financial statements have raised several questions and the new guidance should help answer some of those. Specifically, the definition of an employee is addressed. The new guidance includes an exception from the original - elected outside members of a company's board of directors may be considered employees.

Accounting for options that have been repriced are addressed in the new guidance as well. Fixed option plans for employees have no compensation expense associated with the options when the exercise price is equal to the fair value of the stock at the grant date. The guidance should bring consistency to reporting of stock option plans. FASB hopes that this will help reduce the uncertainty that has existed over the appropriate accounting for many such plans.

Professionals working with companies should keep in mind that when companies directly or indirectly reprice options they are changing the terms of the plan, making it a variable plan. This interpretation applies to repricings that occurred after Dec 15, 1998 and on Jul 1 to new awards granted after Dec 15, 1998 for purposes of applying the definition of employee.

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