FASB: Options Are An Expense At Exercise

May 8, 2003 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB) is moving closer to defining how employee stock option grants are to be expensed, determining companies can expense the cost of profit upon employee exercise, rather than the grant date.

The method adopted by FASB is known as a modified grant-date measurement approach. Under this approach, options are valued as of the date they are granted, but that value is adjusted to reflect options that do not vest because employees leave the company or performance goals are not met, according to a Bloomberg News report.

By comparison, the US accounting rule maker’s international counterpart the International Accounting Standards Board (IASB) has proposed a rule to require companies to expense options based on their value as of the grant date (See    IASB Releases Option Expensing Proposal).  

The decision, part of the FASB process of developing final rules on the issue by next year, means those companies that frequently use stock options could expense the cost of those that vest with employees instead of the total amount awarded. Options typically vest over a three- or five-year period, after which they can be exercised.

FASB decided earlier this month that options are a compensation expense that should be recognized on a company’s financial statement. The decision followed last year’s rash of corporate scandals, some of which involved stock-option abuses (See  FASB Says Yes to Option Expensing ).

FASB Chairman Robert Herz has said he expects the board to release a draft rule on accounting for options as an expense for public comment by the end of this year.