GAAP and IFRS

FASB Delays Option Rule for Some

Nonpublic companies and small-business issuers would have six months longer to begin expensing employee stock options.
Craig SchneiderOctober 21, 2004

The Financial Accounting Standards Board has granted small-business issuers and nonpublic companies six additional months to begin implementing Statement 123R, the board’s proposed rule on expensing employee stock options.

FASB’s decision on Tuesday follows its vote last week to delay the effective date for public companies by six months, from December 15, 2004, to June 15, 2005. For small-business issuers, Statement 123R will now become effective for periods beginning after December 15, 2005; for all nonpublic companies, the rule will become effective for fiscal years beginning after that date.

To be sure, nonpublic entities that have not recognized the cost of options in their income statement or footnotes had already been entitled to the later, December effective date. The board’s decision this week simply gives an extra six months to all other nonpublic entities, regardless of prior accounting treatments.

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Although small-business issuers receive the same six-month extension as nonpublic companies, they still have all the same accounting requirements under the proposed rule as do their larger, publicly traded counterparts.

FASB also addressed the most problematic fair-value-measurement issue for nonpublic entities: estimating expected volatility. At such companies where it’s not practicable to make a reasonable estimate of stock price volatility, the board will allow the use of an appropriate historical index for measurement. That may include an index tied to the company’s industry sector but not a broad market index such as the S&P 500.

Mark Heesen, president of the National Venture Capital Association, believes that delaying the effective date doesn’t go far enough. In a statement, he reiterated concerns about inaccurate option-valuation models and called for FASB to conduct field testing on private and small businesses. “You can’t fix poor public and accounting policies with the passage of time,” he wrote.

At the conclusion of Tuesday’s meeting, FASB board members agreed that no decision made to date on the stock-based compensation project would require the proposed statement to be exposed for further public comment. A final rule on stock-based compensation is expected this December.