U.S. Accounting Board Proposes Stock Option Reform

AFTER MORE THAN TWO years of deliberation, the U.S. Financial Accounting Standards Board (FASB) recently issued Share-Based Payment, a proposed statement on accounting for employee stock-option compensation that would replace the current requirements of Financial Accounting Standard 123, Accountingfor

If approved, the statement would require companies to deduct employee stock options from their profits, bringing the FASB rules in line with the International Accounting Standards Board's recently adopted rules. In creating its proposal, the FASB held more than 35 public meetings, conducted field visits with companies and employee benefit consultants from across the United States, and consulted with recognized valuation experts and numerous other parties.

Stock options, which give employees the right to buy company stock at a fixed price within a certain time period, historically have not been recognized as a company expense. Publicly held companies are simply required to disclose the estimated costs of issuing stock options in the footnotes of their financial statements. 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; that is, the related cost would be recognized in the income statement. The expense of the award would be measured at fair value at the grant date.