By a narrow 4-to-3 vote, the Financial Accounting Standards Board has decided to smooth out a major options-expensing wrinkle.

FASB’s revised rule on stock-option expensing, Statement 123R, requires most public companies to expense options beginning with their first fiscal year starting after June 15. A provision in 123R specifies that when an employee leaves a company while still holding unexercised options, 123R applies only for the first 90 days. If the options were exercised after that time, the thinking goes, matters would be completely outside the control of the granting company.

Since many workers have the right to exercise options for as long as three to five years after they leave their job, finance professionals faced the prospect of applying an assortment of complex tests to determine which standard to apply from day 91 through expiration.

To their relief, at last Wednesday’s meeting the board voted to suspend this provision indefinitely. According to FASB practice fellow Reggie Oakley, “the primary reason” — among the many cited by the four board members who voted in favor of suspension — was that the issues will likely be addressed by another major FASB project, “Phase II Liabilities and Equity.” Exactly when that might be hasn’t been determined, but the suspension of the 90-day provision will remain in effect unless the board explicitly decides otherwise; it will not necessarily lapse when the Phase II project goes forward.

In addition, Emerging Issues Task Force statement EITF 00-19 — which would have required many of these unexpired options to be marked to market beginning on day 91 — has been rendered moot by the suspension.

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In-house finance staff aren’t the only ones who may appreciate FASB’s position. “The preparer community will welcome this because it will simplify their work,” John Horan, a partner at PricewaterhouseCoopers, told CFO.com.

As for the effect on profit-and-loss statements and balance sheets, Horan observes that this will vary greatly, depending on which way a company’s share price is headed and on whether the granting company would have been required to account for the options as a liability or as equity. The options in question, says Horan, “would have been recorded as additional income or additional loss,” respectively.

Looking ahead to this Wednesday’s meeting:

• FASB will discuss the “conceptual framework” project, its continuing attempt to develop a common set of ideas guiding the development of financial accounting for both FASB and the International Accounting Standards Board.

At the last joint FASB/IASB meeting, held April 22 in London, the boards agreed to spend more time on the “qualitative characteristics of accounting information” and to smooth over differences between the FASB standards-based framework and the IASB principles-based approach.

• FASB will also discuss “financial performance by business enterprises,” which will consider the possible need of amendments to FAS 128, “Earnings Per Share,” as a result of the board’s decision to require a single statement of earnings and comprehensive income.

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