Small Businesses May Get Different Option Expensing Route

May 6, 2004 ( - The Financial Accounting Standards Board (FASB) may provide different accounting treatment for small and large companies expensing stock options.

FASB Chairman Robert Herz told a Congressional committee the nation’s accounting rulemaker was concernedabout a “cost-effective” approach to mandatory stock option expensing for small businesses. “I am very interested in the subject, because the cost of any new accounting standard can fall disproportionately on small businesses, so we have to be very careful,” Herz said, according to a Reuters report.

However, George Batavick, chairman of FASB’s Small Business Advisory Committee, said the impact might be minimal.   Testifying before the committee, he said approximately 95% of small businesses do not grant employee stock options.   Further, small businesses tend to be privately held enterprises, which are not required to follow FASB standards, Batavick added.

The potential disproportionate impact mandatory stock option expensing would have on small businesses is the latest issue to emerge in the debate over stock option expensing that erupted following the release of FASB’s Exposure Draft on the topic (SeeFASB Hands Down Option Expensing Proposal ).  Under the Exposure Draft – Share-Based Payment, an Amendment of FASB Statements No. 123 and 95 – 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 would generally be measured at fair value at the grant date, according to the proposal, which has been posted for comment through June 30.  

Congress has been hearing both sides of the issue and some of its members have gotten involved.   Representative Richard Baker (R – Louisiana) has put forth new legislation, HR 3574, that would lessen the potential impact of FASB’s proposal on corporate bottom lines by having all stock compensation granted to rank-and-file employees not counted as an expense.  House Minority Leader Nancy Pelosi (D-California) has thrown her support in with the bill (See  Pelosi Backs Executive Option Expensing Bill ).