Option Expense To Hit Bottom Line Under IASB Proposal

October 15, 2001(PLANSPONSOR.com) - The International Accounting Standards Board (IASB) has proposed a new rule that forces firms to deduct the value of employee stock options from their earnings.

Proponents argue that current accounting rules allow companies to turn compensation, the top expense at most companies, into stock option grants, which have no impact on the bottom line.

The IASB has decided to move forward with a proposal that would force companies to put a value on stock options and subtract them as an expense.

The group has extended the deadline for public comment to December 15, though the panel wants to focus debate on the best way to value options rather than on whether they should be an expense.

Three European standard-setting bodies have recently issued similar proposals, but there is a broad concern that companies could be at a competitive disadvantage if the rules on stock options vary from one country to another.

US Impact

If the IASB adopts the new rule, the Financial Accounting Standards Board (FASB) will take up the matter in the US.

A similar proposal was overthrown in 1995, leading the FASB to rule that companies need only report the cost of stock options in the footnotes of financial statements.

If US companies had been forced to account for the costs of stock options, analysts estimate that aggregate diluted earnings per share would have dropped about 9% in 2000. Profits would have been slashed at many companies, altering the price-to-earnings ratio that investors use to measure one stock against another.