Report: SEC to Ease Some Options Expensing Worries

March 28, 2005 ( - Rules requiring companies to capture the value of employee stock options in financial reports may not be as evil as some have worried, according to a news report.

With the rules scheduled to go into effect for most companies with third-quarter financial statements, the Wall Street Journal reported that federal regulators will advise companies that they will have considerable leeway in valuing their workers’ options as expenses. The Securities and Exchange Commission (SEC) is expected to put out guidance as early as this week containing ways companies can simplify implementation of the new rules, which many corporate officials have blasted as being unnecessarily complex and hard to work with, the newspaper said.

Not only that, according to the Journal report, but the SEC’s anticipated guidance bulletin from the agency’s office of the chief accountant should point out that the Financial Accounting Standards Board (FASB) options valuing standard (See  FASB Releases Stock Option Expensing Rule ) deliberately did not adopt a single standard on how the process is expected to be accomplished and assert that companies won’t be disciplined for using a different valuing technique than similar firms or just because they reached a different conclusion.

One example of a procedural shortcut the SEC staff is expected to bless stems from provisions in the new rules that require companies in some circumstances to treat stock-option pay initially as part of inventory; under generally accepted accounting principles, labor costs are a major component of inventory values. Citing unnamed sources, the Journal said that the bulletin is expected to advise companies that they will be allowed to make end-of-quarter adjustments to their financial statements to estimate the amount of options-based labor cost that should be included in their inventory accounts. Regulators would be recognizing the fact that most companies can’t track such costs on a daily basis, the report said

The Journal report said that the bulletin will include guidance on making assumptions about future stock-price volatility and the expected length of time that employees will take to exercise their options – both important aspects of valuing stock options. The bulletin also is expected to feature provisions on disclosure requirements and accounting for income-tax effects of stock-based compensation, as well as guidance for companies registering their shares on US exchanges for the first time, among other things.

Some companies have raised concerns that they could become targets of class-action litigation or regulatory action if their initial valuation estimates turn out to be wrong. The bulletin is expected to ease companies’ worries on that score by spelling out that there rarely will be situations where there is only one right answer in estimating the value of a given company’s options, the Journal’s sources said.