This Year’s Leap: Expensing Options

Last year's plan to converge with international standards, however, has not led to any consensus in the States.
Stephen TaubMarch 1, 2004

The Financial Accounting Standards Board will meet on Wednesday to consider whether and how companies should account for equity-based compensation on their financial statements.

A year ago this month, FASB initiated a project to address issues related to equity-based compensation (EBC). One objective of the project, according to FASB’s web site, is to cooperate with the International Accounting Standards Board “to achieve convergence to one single, high-quality global accounting standard on EBC.”

The pressure was certainly turned up on FASB a couple of weeks ago when the IASB announced that companies using international accounting standards must expense stock options beginning January 1, 2005. The IASB ruling will affect about 7,000 publicly traded companies in 90 countries, excluding the United States.

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Many groups, however, are fighting this effort. They especially include small, start-up companies and venture capital firms.

“What the IASB came up with is not unexpected,” John Palafoutas, a domestic policy and congressional affairs lobbyist for the American Electronics Association, the nation’s largest high-tech trade association, told “We are not obligated to do what the Europeans do. They use stock options differently than we do, and we’re going to keep fighting against it.”

Earlier this month Karen Kerrigan, chairman of the Small Business Survival Committee, an advocacy organization, criticized FASB for refusing to conduct field testing on proposed options-valuation methods. (It now appears that FASB will recommend a binomial or similar method in addition to the widely used Black-Scholes model.)

“FASB’s refusal to conduct field testing is a ‘brush-off’ to American small businesses and entrepreneurs,” Kerrigan said in a statement. “We urge Congress to take action to protect small businesses and to prevent FASB, an unresponsive, unaccountable body, from implementing an untested valuation method that could have disastrous consequences for America’s entrepreneurs.”

“FASB somehow believes that talking to 18 companies about the costs of implementing an expensing standard is a satisfactory way to secure input on valuation and undertake a cost-benefit analysis,” continued Kerrigan. “That approach is woefully inadequate and ignores the needs of small businesses around the country.”

The International Employee Stock Options Coalition, a longtime lobbyist on behalf of the technology sector against expensing stock options, also recently urged FASB to field-test multiple models for expensing options before proceeding with its project.

On FASB’s behalf, spokeswoman Sheryl Thompson has stated that “the ultimate field test has already taken place.” Public companies “have been performing this field test for seven consecutive years, so the test sample is huge. It probably involves thousands of companies.”

According to FASB’s web site, the board planned to issue an exposure draft this month. (Send for free email alerts on accounting or FASB issues, and we’ll notify you when we publish several articles that are already in the works.) FASB intends to complete its redeliberations and issue a final statement in the second half of 2004.