FASB tries to ease transition to stock option expensing

FASB tries to ease transition to stock option expensing

The Financial Accounting Standards Board (FASB) has again taken up the issue of accounting for stock option compensation at its 7 August 2002 and 14 August 2002 board meetings. This time, the board is not trying to require that such compensation be reported as an expense on income statements under a fair value method. Rather, it is offering companies three ways to make a voluntary transition to such reporting - (i) recognise stock compensation cost for awards granted after the beginning of the fiscal year in which the change is made; (ii) recognise such costs for the year of the change equal to that which would have been recognised if Statement 123, Accounting for Stock-Based Compensation, had been adopted as of its effective date; or (iii) recognise those costs for the year of change and restate prior financial statements as though Statement 123 had been used.

One of the factors that are giving companies an impetus to make the change is that, within the next month, the IASB is likely to issue a proposed standard that would require the expensing of stock option compensation. While the standard would not necessarily apply to U.S. companies at present, much of the rest of the world, including those of the European Community, would meet the international standard. That standard, however, uses a different methodology from the one that is recommended by FASB.

Some companies are converting in order to improve their image in the wake of corporate accounting scandals. The high-tech sector, which has been most resistant to the expensing of stock option compensation on income statements, led the charge in the mid-1990s that led to FASB backing down from a proposed requirement that options expensed in the same way as other compensation. The same sector is now resisting the IASB project.

That sector is also expected to be highly critical of the FASB proposal and is already saying that the three alternative methods for conversion will result in incomparable financial statements. A representative of the high-tech industry said that rather than clarify and facilitate the transition, the proposal only makes the picture cloudier.

According to FASB project manager, Patrick G. Durbin, the board recognises that financial statements will show differences as companies choose among the three alternatives or to not convert at all. The board is amending the disclosure provisions of Statement 123 so that every company, regardless of their decision, will have comparable information disclosed. FASB has been keeping track of how many companies have already stated that they will be expensing employee stock options. Among the more than 80 companies are Allstate, Boeing, Pendant, Coca-Cola, Dow Chemical, General Motors, Marathon Oil, Merrill Lynch, MetLife and Wal-Mart.

The Board is expected to issue an Exposure Draft asking whether American business agrees with the IASB proposal. If the U.S. ever decides to accept international standards, companies may have to expense stock option compensation in a manner similar to the one that FASB proposed prior to adopting Statement 123.

(Source : http://www.electronicaccountant.com/AccountingToday/ and http://www.fasb.org/)