IESOC: Option Expensing 'Unwise'

June 29, 2004 ( - The International Employee Stock Option Coalition (IESOC) has called the Financial Accounting Standards Board's (FASB) recent mandate to record all stock option grants as an expense "unwise."

The Coalition told the nation’s accounting rulemaking board that the IESOC opposes FASB’s mandatory stock option expensing proposal because such a mandate is not supportable from a technical standpoint and also because it will hurt U.S. competitiveness.   By requiring stock options to be recorded as an expense on the grant date, IESOC said many companies will be forced to curtail or eliminate their broad-based stock option plans.  

The IESOC, which operates the Web site , has also helped lead an electronic petition drive collecting signature of employees that oppose the FASB option expensing mandate.   Previously, the IESOC urged FASB to conduct a field test of various stock option valuation models due to the   “widespread recognition” that an accurate method for valuing employee stock options does not currently exist (See  Coalition Calls For Option Expensing ‘Field Test’ ).

Under FASB’s Exposure Draft issued on March 31, all forms of share-based payments to employees would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award generally would be measured at fair value at the grant date (See The Bottom Line: Expensing Proposition ).   To arrive at this cost, FASB provided several valuation techniques in the Exposure Draft, including a lattice model (an example of which is a binomial model) and a closed-form model (an example of which is the Black-Scholes-Merton formula) that would meet the criteria for estimating the fair values of employee share options.

FASB held a round of hearings Tuesday to consider its proposal to mandate expensing of employee stock option plans ahead of the close of the public comment period on the board’s option mandate.   The public comment period of FASB’s Exposure Draft ends June 30.