IASB Mandates Option Expensing in '05

February 19, 2004 (PLANSPONSOR.com) - As of January 1, 2005, companies using international accounting standards will be required to treat stock options as an expense.

Under the international mandate, companies will be required to expense all stock option grants issued after November 2002 that have not yet vested or been exercised by employees.   The International Accounting Standards Board (IASB), the body responsible for international accounting standards, handed down the decision Thursday.

T he London-based accounting body, in a news release posted on its Web site, characterized the rule as a means to fill in a “gap in international standards”.   Currently, companies governed by the IASB’s accounting standards are not required to expense stock options or to disclose the levels of their issuance.

The move will have a broad impact as a new year dawns as more than 7,000 publicly traded companies in the European Union will be shifting to international accounting rules at the start of 2005. Eventually, international standards are expected to be in use in more than 90 countries around the world, although they will not apply to companies domiciled in the United States.

Companies for which this a new standard applies will be able to choose the method used to calculate the value of the stock option.   Further details on the options available to companies for their expensing calculus were not divulged by the IASB’s statement.

The move by the IASB does not bode well for opponents of mandatory stock option expensing in the United States.    The US accounting rulemaking body, the Financial Accounting Standards Board (FASB), has previously announced a proposal for stock option expensing should be unveiled by the end of March.   The proposal, according to FASB, would be followed by a standard on stock options by the end of the year that would take effect sometime in 2005 ( See   FASB: Option Expensing Begins in 2005).

Opponents of mandatory expensing have said it will mean the end of broad-based equity plans, that it is impossible to accurately value options since formulas being proposed are overly complex, and that current earnings per share disclosure rules are adequate (See   Black-Scholes Overvalues Stock Options).