FASB Rejects Staff Recommendation

October 8, 2004 (PLANSPONSOR.com) - The Financial Accounting Standards Board (FASB), by a narrow margin, has rejected a staff recommendation that would have treated compensation costs from deep out-of-the-money options more fully on income statements.

The question before the board, the nation’s accounting rulemaking body, dealt with whether equity awards should be viewed to as having undergone a formal change so that accelerated vesting would not result in added costs upon implementation. In a 4-3 decision on Wednesday, FASB voted for a course of accounting that would allow companies to minimize their expenses going forward for deep out-of-the-money options awarded. The staff had recommended that these options should be recognized more fully in income statements.

Board members Robert Herz, George Batavick, Gary Schieneman, and Leslie Seidman all voted against the staff recommendations, with Seidman claiming that she did not agree with the staff because it was an anti-abuse provision. Edward Trott, Michael Crooch, and Katherine Schipper voted for the recommendation, with Schipper asserting that the proposition would have provided for more representatively faithful accounting.

At their regular board meeting, FASB officials also voted on reporting of deferred tax balances. These actions came one week before the board will decide on whether to stick to a pre-determined timetable for having the new stock options expensing rules in place by the start of next year.

There has been much consternation by companies who feel that the regulatory propositions will put an undue burden on their shoulders if they must be implemented by January 1. Corporations have often pointed to the extensive internal controls needed as a reason to delay the implementation. The Security and Exchange Commission (SEC) has signaled that it would endorse a deferral of FASBs stock options expensing rules.

This action comes as part of a long line of propositions from the FASB, which has been working for over a year on revising stock options expensing rules (See The Bottom Line: Expensing Proposition ).

Staff comments, summaries, recommendations, and examples are available at www.fasb.org under the titles ‘Board Meeting Handouts’ and ‘Action Alert’.