Ending months of uncertainty, the Financial Accounting Standards Board has decided to delay by six months the effective date for public companies to implement Statement 123R,
its proposed standard that would require companies to expense the value of employee stock options in the income statement.
FASB’s exposure draft had proposed an effective date for public companies of January 1, 2005 (that is, for fiscal periods beginning after December 15, 2004). After much debate, the board members agreed with the FASB staff recommendation that the proposed rule should become effective for fiscal periods beginning after June 15, 2005. FASB also agreed to allow for modified retrospective application (using Statement 123 footnote disclosures) for earlier interim periods in the year of adoption. The standard-setters will address the effective date for non-public entities at a later meeting.
Steven Getz, a spokesman for FASB, said the decision to delay the effective date was “a difficult balancing act.”
While there was a general desire among board members to implement the accounting rule as soon as possible to improve the quality of reported financial statements, they also conceded that companies needed more time to properly implement option valuation methods such as the lattice model, to reconsider the structure of their compensation plans, and to educate investors.
Board members also had concerns about putting preparers under too much strain in the first calendar quarter of 2005. For many companies, Section 404 of the Sarbanes-Oxley Act — which will guide how auditors report on companies’ assessments of their internal controls — becomes effective with their first fiscal year ending after November 15.
The six-month delay is not entirely unexpected. Legislators and industry have been calling for the Securities and Exchange Commission, which oversees FASB, to step in and delay the proposed effective date. SEC chief accountant Donald Nicolaisen had publicly stated his support for a delay past the first quarter of 2005 to allow companies and auditors more time and energy to focus on the Sarbanes-Oxley 404 requirements. And earlier this year, the U.S. House of Representatives approved legislation that would delay the accounting rules except those options granted to the top five executives in the company.
FASB remains on target to issue its final statement before the end of this year.