FASB votes to review stock-based compensation standards

The Financial Accounting Standards Board (FASB) yesterday voted to review its standards on treating the cost of employee stock options as an expense. The move follows the submission of almost 300 industry comments on the issue.

FASB believes there is a need for one consistent approach to recognise the costs associated with employee stock options. It intends to examine whether there are ways to improve the precision and consistency of measuring the cost of the options, and whether additional information disclosure is required.

“A move to require an expense treatment would be consistent with the FASB’s commitment to work towards convergence between US and international accounting standards,” said Robert Herz, FASB chairman. “In taking all these factors into consideration, the Board concluded that it was critical that it now revisit this important subject.”

Investors’ demand for options to be accounted for as expenses got a boost last year when rating agency Standard & Poor’s began factoring in stock option grant expenses to determine core earnings. This, together with political pressure on the back of US corporate accounting scandals, and moves by UK-based accounting standards setter the International Accounting Standards Board (IASB) to make treating stock options as an expense a requirement, led many US companies to voluntarily adopt the practice. Coca-Cola, Ford Motor Company and General Electric are just some of the companies that now treat employee stock options as an expense.

FASB first proposed that companies be required to recognise stock-based compensation in the income statement using a ‘fair value’ method in the mid 1990s. But it subsequently backed down in the face of strong opposition and allowed the continued use of the ‘intrinsic’ approach to valuation, which is regarded as something of a whitewash because it generally gives a compensation cost of zero.

In November, the FASB asked for comments on whether it should review its current guidelines, contained in Statement No. 123, Accounting for Stock Based Compensation, and its Related Interpretations. The deadline for comments was reached last month, with 293 responses.

The IASB proposes mandatory treatment of employee stock options as an expense using the fair-value approach. European Union companies are set to adopt the practice in 2005.

US senator Carl Levin (Democrat, Michigan), who has been advocating stock option accounting reform for the past 10 years, welcomed the vote. “Corporate scandals have shown how current US accounting rules are fuelling stock option abuses linked to excessive executive pay, dishonest accounting, and nonpayment of taxes by profitable corporations,” he said. “FASB made the right decision today. Stock options are the 800-pound gorilla that has yet to be caged by corporate reform.”