FASB recommends treating stock options as expenses

The Financial Accounting Standards Board announced March 31 the publication of an exposure draft, "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." In the draft, the FASB recommends companies treat stock options as an expense on company income statements, a move that could potentially affect profitability.

Under the FASB's proposal, all forms of share-based payments to employees, including employee stock options, 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. Current accounting guidance requires that the expense relating to so-called fixed plan employee stock options only be disclosed in the footnotes to the financial statements.

Since the FASB added the project to its agenda one year ago, the board has held more than 35 public meetings, conducted field visits with companies and employee benefit consultants from across the country, and consulted with recognized valuation experts and numerous other parties.

According to FASB, the proposal also would achieve substantial convergence in this important area between U.S. and international accounting standards. Reports show that approximately 500 public companies in the U.S. are treating stock options as an expense or plan to do so in the near future. The International Accounting Standards Board and Canada recently issued requirements to expense share-based payments, including employee stock options.

The proposed change in accounting would replace existing requirements under FAS 123, Accounting for Stock-Based Compensation, and APB Opinion No 25, Accounting for Stock Issued to Employees. The comment period for the exposure draft ends June 30, 2004. The document is available on the FASB's Web site at www.fasb.org.

Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants.