U.S. accounting board proposes stock option reform.

A FTER 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, Accounting

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.

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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.

Proponents of the reform--mainly investors--say the new standard will improve the accuracy, completeness, and quality of financial statement information, as well as reign in out-of-control corporate compensation packages. Opponents see it as a blow to employees who receive stock-option compensation in lieu of cash bonuses or annual pay raises.

If adopted, analysts expect the standard to have far-reaching implications. The Wall Street Journal recently reported that earnings for companies within the Standard & Poor's 500 stock index would have been 10.6 percent lower in 2003, 19.2 percent lower in 2002, and 21.5 percent lower in 2001 if all the component companies had treated stock options as an expense. Currently, analyst reports show that approximately 500 public companies in the United States are treating stock options as an expense or plan to do so in the near future.

The FASB published the exposure draft on its Web site, www.fasb.org, inviting comments through June 30. If approved by the U.S. Securities and Exchange Commission, it would become effective for fiscal years beginning after Dec. 15.