The Financial Accounting Standards Board decided last week to step back from a proposed rule for how companies should account for the income-tax effects of share-based compensation. In its place, FASB retained earlier guidance that allows for a simpler, portfolio-type accounting approach.

The decision marked FASB’s second recent retreat under criticism from provisions of its exposure draft, Statement 123R, which proposes a mandate for expensing stock options. After considering views expressed in letters and public roundtable discussions, board members voted 4-3 in favor of the accounting approach already established and practiced under Statement 123, which many respondents said they preferred.

The proposed method, a so-called two-transaction view, would have required many companies’ accounting systems to be modified so they could track individual awards of stock options, according to critics. “Statement 123’s portfolio approach means that you didn’t have to track each individual option,” explained Mike Tovey, a FASB project manager. “You look at them as a pool.”

Statement 123 also differs from 123R in how companies reconcile their estimated and actual tax deduction benefit. If there’s any tax shortfall, where the actual tax benefit is less than expected, 123 requires that the amount be recognized in the income statement unless there are excess tax benefits sufficient to absorb the shortfall, in which case it’s written off against equity. Under 123R, those shortfalls would always be recognized in income.

That simplification is good news for Arnold Hanish, Eli Lilly’s chief accounting officer, who anticipated “significant costs” to build and maintain systems that could track the tax impacts of employee stock option grants to 40,000-plus employees in more than 90 countries. “This task is very difficult for a multinational company that needs to accommodate multiple tax jurisdictions and movement of employees within these jurisdictions,” Hanish noted in a comment letter.

Separately, the FASB voted on Wednesday to modify its guidance in the exposure draft for accounting for employee share purchase programs. Tovey says the end result is a “blend” of the new and old, wherein the 123R eliminates some specific wording relating to a 5 percent discount in the original. “This is another area that they moved back in the direction of [FAS] 123,” Tovey said.

Two weeks ago, FASB members also voted to return to guidance under Statement 123 in relation to the allocation of the cost of options. Again, many respondents had opposed the exposed guidance because it would create a huge burden for tracking stock option plans for individual employees.

The original guidance for accounting for the tax impact of stock options in FAS 123 is less convergent than under FAS 123R as a matter of principle, Tovey noted, but that may depend on facts and circumstances of the company. FASB and IASB have agreed to revisit the tax issue at a later point to work towards convergence.

Tomorrow, FASB plans to address issues raised in FAS 123R related to modifications and settlements, a modified grant-date method and out-of-the-money options, and fair-value measurement. In addition, the board may address issues related to disclosures, transition, and the effective date for public companies.

FASB is also scheduled to consider delaying the effective date of its proposed standard for stock-based compensation. The Securities and Exchange Commission, which oversees FASB, typically defers to the board’s judgment on technical accounting matters and does not interfere in its independent rulemaking process. However, SEC chief accountant Donald Nicolaisen has repeatedly expressed concern about the timing of the rule that would mandate the expensing of employee stock options.

“I don’t think the first quarter of 2005 is the right time to introduce that standard on a required basis,” said Nicolaisen, in an interview with CFO.com. “I think it would interfere and cause additional tension for them to deal with 404 and all of the disclosure requirements.” Nicolaisen says he also wants to ensure that the commission and the board have sufficient time to issue the appropriate implementation guidance before the standard becomes effective.

Nonetheless, he maintains that aside from his public comments, he does not direct the board’s decision-making or “instruct the FASB staff in any way.” Added Nicolaisen, “We want them to objectively and independently determine the standard.”

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