FASB Contemplates Pushing Back Option Expensing Date

“We may need more time,” FASB Chairman Robert Herz said following a day of roundtable discussions held yesterday at the Norwalk, Connecticut headquarters of FASB.   “We are hearing people say they are stretched to the maximum,” according to Bloomberg News coverage.

While Herz did not offer a specific proposal as to how far back the nation’s accounting rulemakers might push a mandatory expensing deadline, the Securities and Exchange Commission’s (SEC) chief accountant, Donald Nicolaisen, suggested delaying the enactment date from 2005 to 2006.   Nicolaisen pointed to another regulatory act passed in 2002, Sarbanes-Oxley, and the struggles companies have to be complaint with that measure as the reason for the possible postponement.

Under FASB’s Exposure Draft issued on March 31, all forms of share-based payments to employees would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award generally would be measured at fair value at the grant date (See The Bottom Line: Expensing Proposition ).  To arrive at this cost, FASB provided several valuation techniques in the Exposure Draft, including a lattice model (an example of which is a binomial model) and a closed-form model (an example of which is the Black-Scholes-Merton formula) that would meet the criteria for estimating the fair values of employee share options.

FASB held the round of hearings Tuesday to consider its proposal to mandate expensing of employee stock option plans ahead of the close of the public comment period on the board’s option mandate.  The public comment period of FASB’s Exposure Draft ends June 30, after which time, FASB will hand down a final version of the proposal that must then be ratified by the SEC.

The idea of pushing back the compliance deadline is already being considered in halls of Congress. Earlier this month, t he US House of Representatives Financial Services Committee approved a bill to delay implementing any standard for a year, until completion of an economic impact study by the federal departments of Labor and Commerce.   The bill would also restrict any option-expensing standard from FASB to options granted to the top five officers of a company (See  FASB Options Expensing Limit Bill Gets Committee OK ).

The bill’s sponsor, Representative Richard Baker (R-Louisiana), said the measure was aimed at protecting broad-based stock option plans that start-up companies often use to attract workers.    But opponents contend federal lawmakers need to stay out of setting accounting standards, especially just two years after voting to increase FASB’s independence in the Sarbanes-Oxley Act crackdown on corporate corruption.