FASB Amends FAS 123

FASB Statement 148, Accounting for Stock-Based Compensation -Transition and Disclosure, comes in response to a growing number of companies announcing plans to record expenses for the fair value of stock options.   

Under the provisions of Statement 123, companies that adopted fair value based method were required to apply that method prospectively for all new stock option awards. This contributed to a “ramp-up” effect on stock-based compensation expense in the first few years following adoption, which caused concern because of the lack of consistency in reported results.

Statement 148 address that concern by providing two additional methods of transition that reflect an entity’s full complement of stock-based compensation expense immediately upon adoption, eliminating the “ramp-up” effect.

Additionally, Statement 148 provides greater clarity and prominence of disclosures about the pro forma effects of using the fair value based method of accounting for stock-based compensation for all companies, by requiring that the data be presented more prominently and in a more user-friendly format in the footnotes to the financial statements.

The transition guidance and annual disclosure provisions of Statement 148 are effective for fiscal years ending after December 15, 2002, with earlier application permitted in certain circumstances.

These disclosures are also now required for inclusion in interim as well as annual financial statements, with these provisions becoming effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. In the past, companies were only required to make pro forma disclosures in annual financial statements.

Copies of Statement 148 may be obtained by placing an order at the FASB’s Web site  www.fasb.org .