Human Capital & Careers

IASB Requires Options Expensing

International Accounting Standard 2 is out. FASB's exposure draft is next on the horizon.
Ed ZwirnFebruary 20, 2004

Beginning next year, tssuers of stock in European Union capital markets will have to treat the costs of providing stock options as an expense on their financial statements.

That’s the latest on the options-expensing issue from the International Accounting Standards Board (IASB). On Thursday, IASB issued International Reporting Standard 2, on accounting for share-based payment transactions, including grants of share options to employees.

Slated to become mandatory on January 1, 2005, the new standard “requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees,” the IASB said in its announcement.

In the United States, the Financial Accounting Standards Board, which has committed itself to catching up to its European counterpart in the name of convergence, is expected to issue its own exposure draft in March. The standard is set to force companies to expense stock options or count them as a routine cost like wages on their income statements. The FASB has also said it will recommend not only the Black-Scholes method but also a binomial or similar method for valuing the stock options.

Congress overturned a similar effort by FASB to expense employee stock-based compensation in 1994. CFO covered the 21st century battle in that war over stock option expensing on Capitol Hill in “Who Rules Accounting?.”

Indeed, hundreds of U.S. companies changed to expensing options recently in the wake of post-Enron scandal accusations that the issuance of employee stock options helped companies to inflate earnings. But FASB arguably still has its work cut out for itself as it evaluates public comment on the issue and the controversy relating to the inadequate valuation models for stock-based compensation.