Accounting & Tax

Employers: Expensing Options Coming

Vast majority of employers think expensing worker options will soon be mandatory.
Stephen TaubSeptember 16, 2002

Most U.S. employers — 87 percent — believe that option expensing will be mandated within five years. But only 37 percent have formally considered the issue at the executive or board level. This, according to a new survey from Mercer Human Resource Consulting.

The majority of the respondents (56 percent) said they are considering the implications of expensing options, but are currently taking a wait-and-see approach.

Other respondents said their companies will begin expensing options when a structured approach or common methodology is approved. Only 9 percent indicated they will begin expensing as soon as practical. A mere 5 percent plan to lobby actively against option expense recognition.

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The survey, conducted during the first two weeks of August, includes responses from nearly 200 large U.S. employers with median revenues of $4.5 billion.

Under Statement of Financial Accounting Standards 123, companies currently must disclose the fair value cost of stock option grants and the resulting pro forma impact on earnings per share in the footnotes to their annual financial statements. They do not have to recognize that cost in their income statements, however.

The Financial Accounting Standards Board (FASB) now is considering a change that would make the expensing of stock options mandatory rather than optional.

If the accounting rules are changed, though, a number of respondents in the Mercer survey made it clear they would be unhappy. Just 12 percent said expensing is “the right thing to do.” Fully 28 percent characterized an accounting charge for option expenses as “inappropriate.”

Others in the survey said options should be expensed only if a consistent manner is used by all companies (25 percent), a reliable valuation method can be found (12 percent), or the company wants a tax deduction (2 percent).

Not surprisingly about 63 percent of respondents conceded that the effect on reported income weighed most heavily in their decisions. A company’s philosophical view on accounting was also a significant factor, cited by 48 percent of the respondents.

If required to expense options, a little over a third of the respondents said the switch would reduce their companies’ earnings per share by less than 5 percent. Another 28 percent said it would lower EPS by 5 percent to 10 percent.

And what will companies do to mitigate the potential effect of stock option expensing on their equity compensation programs? One-third say they would reduce the number of options granted to workers. About the same percentage indicated they would reduce the number of employees who receive stock options.

(Editor’s note: So why did AMB Property decide to go ahead and expense options? To find out, read Five Questions, with AMB CFO Mike Coke.)