FASB Studies Three Option Expensing Paths

August 8, 2002 (PLANSPONSOR.com) - With increasing numbers of companies announcing they would now voluntarily expense employee stock options, the nation's accounting standards board has agreed to help guide them on how to do that.

The Financial Accounting Standards Board (FASB) said this week that it would look over three expensing methods, Dow Jones reported:

  • the existing “clean slate” method, which allows companies to expense options granted since the beginning of the fiscal year in which they decided to begin expensing them, without grandfathering options granted in previous years
  • a new method under which companies would expense new options issued since the beginning of the fiscal year as well as the unvested portion of previous awards
  • a retroactive restatement method under which companies would restate all previous periods, back to 1995, to reflect the compensation expense measured under the fair value method

The board said it would consider giving companies a choice between two or three of these accounting methods.

The FASB agreed it would not take up a fourth method under which companies would have had to take a one-time charge accounting for the cumulative effect of options awards since 1995.

During its first meeting on the topic this week, the FASB also agreed to examine whether “pro forma” information about the value of stock options disclosed in the footnotes of financial reports should be moved to the face of companies’ income statements to provide a better and easier-to-find picture, according to the Dow Jones report.

The project is on a fast-track schedule, with an exposure draft on the issue expected to be made public in the third quarter and a new standard expected by the end of the year, according to the report.

Current Practices

Under current rules, companies that choose to reflect stock options on the expense side, reducing per-share earnings, only have to account for options granted since the beginning of the fiscal year in which they started expensing.

Under this scheme, options worth million of dollars dating back to before the move to option expensing go totally unrecorded.

Firms going the option expense route now have to record the fair value of the options or at least put their theoretical value in the footnotes of their financial reports, according to current rules

But more companies have recently voluntarily migrated to expensing the stock options.

Following Coca-Cola Co., Washington Post Co. and others, General Motors Corp. and Citigroup Inc. this week said they planned to start expensing next year.