FASB Reverses Options-Cost Decision

Straight-line amortization is okay again; board also reaffirms the basis for options classification as equity.
Craig SchneiderAugust 20, 2004

Spurred by criticism for corporate executives and public accountants, the Financial Accounting Standards Board (FASB) on Wednesday decided to change its guidance on how companies should attribute the cost for employee stock option awards with graded vesting. After it had eliminated a straight-line-amortization option, the board reversed course and chose to include it.

FASB has been meeting specifically to address questions and concerns raised in letters and public roundtable discussions about its proposed stock-based compensation standard. Several respondents objected to a provision that would have had employers issuing awards with graded vesting – that is, awards, for which different parts vest at different times—treat each separately vested portion as an award.

The board, however, decided Wednesday to return to its cost-attribution guidance under Statement 123, an earlier standard that provided companies with the choice to also recognize the awards on a straight-line basis. FASB’s new proposal, referred to as 123R, had eliminated that option, according to Mike Tovey, FASB project manager, and companies objected to 123R for being overly complex.

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“It will simplify the application of Statement 123R,” said Tovey, FASB project manager, who called the modification of graded-vesting accounting “very significant.”

Some respondents objected to using FASB’s method for graded vesting because it would mean more compensation cost would be attributed to early parts of the vesting period of an award and less to later portions. Critics argued that the attribution would thus not effectively correspond to the perceived value of an employee’s service during the award vesting period.

Separately, FASB also reaffirmed on Wednesday the basis for employee stock options being classified on the books as equity, not liability. Tovey told that specific option classification issues involving disparities between 123R and other areas of GAAP would be addressed in an ongoing separate project on liabilities and equity.

Next week, FASB is expected to meet to discuss employee stock purchase plans and accounting for the income-tax effects of share-based payment awards.