FASB Holds Fast on Options

Amid a torrent of criticism, FASB plowing ahead with rules for stock option expensing. Plus: plumbers needed at SEC.

It’s likely going to take a lot more than a roundtable discussion of lawmakers, executives and accounting rulemakers, to reverse an interim decision that requires companies to treat stock options as an expense.

Certainly, the Financial Accounting Standards Board showed no signs of making a regulatory U-turn last Wednesday when it continued deliberations on stock-based compensation. This time, FASB addressed the specific area of attribution for stock options. The board, which already decided that companies should value stock options at the grant date, agreed to allow employers to adjust stock option expenses for estimated forfeitures.

Sheryl Thompson, a FASB spokeswoman, says the decision (which allows companies to book a lower stock options expense based on estimates of employee turnover) is consistent with what the FASB previously stated in Statement 123. “If an employee is leaving prior to vesting or performance targets are not met if the options are conditional, you would reverse out the expense at the vesting date, in essence because your cost is zero,” she explains. “At vesting, you provide any truing up that needs to be made, plus or minus.”

Meanwhile, FASB came under fire again last week at a Washington, D.C. roundtable, “Preserving Partnership Capitalism Through Stock Options for America’s Workforce.” At the meeting, lawmakers and executives protested the board’s decision to require companies to expense stock options, citing the often-heard complaints about deficient valuation methods and likely cuts to broad-based stock option plans, among other issues.

Consider the comments of Michael Enzi (R-Wyoming), the lawmaker responsible for putting together the “brain trust” of business leaders at the meeting: “My colleagues are concerned that FASB has jumped from ‘whether to expense’ to ‘how to expense’,” he said, according to a Financial Times account of the event. “I am disappointed in the appearance that everything has been decided already.”

Enzi didn’t help his case, however, when he later issued a press release that referred to FASB as the “Federal Accounting Standards Board.” Enzi, an accountant, chairs the Senate Banking Subcommittee on Securities.

In last week’s RegWatch column, Michael Crooch, a FASB board member, noted that the stock options project is still in the early stages of deliberations. FASB Chairman Robert Herz reiterated that point at the roundtable: “I have strong views personally, but we are a seven member board and have just started the process,” Herz noted, according to the FT story. “You never know [what we will decide] until we go through every step.”

Deliberations over stock-based compensation are scheduled to continue on June 4. FASB has been reexamining accounting for stock options in the wake of several high profile accounting scandals where corporations used stock options to avoid paying U.S. taxes while overstating earnings. The board is also looking to provide new rules that converge with international accounting standards. FASB will also address the general disenchantment with today’s employee stock option valuation methods (likely in late June/early July, according to Thompson).


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