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It seems there’s plenty of time to keep the debate raging over whether and how to treat employee stock options as an expense.
The Financial Accounting Standards Board appears to be making some progress on that front. In a recent decision, the board unanimously voted in favor of expensing stock options. But it is only the first of many moves as FASB looks to issue an exposure draft on the matter later this year. A final draft is being eyed for 12 months from now, but the stock-based compensation project, concedes Michael Crooch, FASB board member, has been “a little bit of a moving target.”
Today, the board is scheduled to discuss measurement and attribution issues related to stock-based compensation transactions. At its April 22 open meeting, the board has tentatively determined, among other things:
- That the exchange of goods or services received for stock-based compensation should be measured at the grant date and
- That the measurement attribute for the exchange is fair value.
In today’s meeting, Crooch says he and his FASB board members will determine “how to attribute the cost of the options over the vesting period so that the cost of the option plan can be charged to income each period.”
One choice, he says, could involve spreading the value equally over the vesting period of the stock option grant.
Alternatively, the board may allow companies to make certain assumptions in their calculations that effectively lower the value of the options expense. For instance, a company would not have to account for options granted to a number of employees who management figures will leave the company before the vesting date and thus forfeit their options. Managers could then “true up” or adjust the estimates, Crooch says, if they were wrong because more or less employees left the business.
FASB is 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. Aside from the stock option abuse, the board is also looking to provide new rules that converge with international accounting standards, as well as address the general disenchantment with today’s employee stock option valuation methods.
Crooch notes that the board has already spent a lot of time on stock-based compensation and valuation of employee stock options in the early ’90s. Given that, FASB’s advisory panel of valuation experts will look for “any breakthroughs since the last time that will help us get a better measurement.”