FASB: Option Expensing Begins in 2005

October 30, 2003 (PLANSPONSOR.com) - Stock option expensing will be mandatory for all United States companies beginning in 2005.

The word was handed down following the Financial Accounting Standards Board’s (FASB) meeting yesterday. FASB is expected to propose rules for public comment in February

2004 and issue final rules on stock option expensing in the second half of 2004, Dow Jones reports.

In addition to finally issuing an effective date for option expensing, the nation’s accounting rulemaker issued a requirement that only one method be used in making the expensing transition.    Under the Norwalk, Connecticut-based FASB’s ” modified prospective” approach,companies will have to expense all previously granted options at once, in addition to options issued in the year companies make the accounting change.  

This position differs from the three transition options currently available to the few companies that have elected to expense stock options voluntarily (see  Tech Companies Resist Option Expensing ).     FASB’s new requirement would fall between two existing transition methods. Under one of them, companies take a “prospective” approach, expensing newly granted options but ignoring options granted in prior years. The other one calls for companies to restate prior years’ results to include previously granted options as an expense.

While it may be problematic for some employers, the unified transition method will definitely sit well with financial analysts, who criticized the current approaches that make   comparing option costs, and their effects on the corporate bottom line, difficult across different companies.  

The board also agreed on the necessity of disclosing the objectives in requiring stock option expensing to help investors understand the effects of options and other equity-based compensation.   Currently, specific disclosure requirements are still in the works, but more than likely they will include asking companies to specify the option-pricing formula they choose.   This comes after FASB previously stated it would not designate on single stock option pricing formula, allowing companies to choose between the Binomial valuation method and the more commonly used Black-Scholes model (See  FASB Deflects Option Valuation Method to Companies ).