by Ken Rankin

Washington - The accounting treatment for employee stock options - a hot potato that United States accounting standards setters dropped in the 1990s - is back on the front burner at the Financial Standards Accounting Board.

Officials at FASB are not be ready to resurrect their original plan for mandatory recognition of stock options as an expense on corporate financial statements, but they are considering a new interpretation of SFAS 123 that could require companies that elect to expense stock options to do so retroactively.

The board raised that possibility as part of a discussion of whether to undertake "a limited-scope, fast-track project related to the transition provision in FAS 123" - FASB’s current standard governing stock option accounting.

Those standards, which encourage but don’t require, corporations to treat employee stock options as expense items in their financial statements, were issued in the mid-1990s after the board abandoned its plan for mandatory stock option expensing "in the face of strong opposition from many in the business community and in Congress that directly threatened the existence of the FASB as an independent standard setter," the board explained.

FASB’s move to revisit the issue was triggered by the recent flurry of corporations that have announced plans to treat stock options as an expense - a move to rebuild investor confidence following the recent rash of corporate accounting scandals.

In recent weeks, such blue chip companies as Coca-Cola, General Electric and Amazon.com, have announced plans to expense employee stock options - a trend that drew praise from the FASB.

Under the existing version of FAS 123, companies that elect to expense employee stock options are required to do so prospectively for options granted after the date of the change.

"This transition provision was appropriate when FAS 123 was issued in 1995 because, at that time, companies did not have valuation information available relating to previous grants of employee stock options," FASB said. "However, that is no longer the case given the disclosure requirements that have now been in effect since 1995 under FAS 123."

FASB’s decision to reopen the debate over standards for stock option accounting comes as Congress is considering a series of bills that mandate the expensing of these costs.

"Stock options that are not included on a company’s financial statements can misrepresent the true value of a company," said Rep. Diana DeGette D-Colo., one of several congressional reformers who consider the lack of a stock option expensing requirement to be a gaping deficiency in the new corporate accounting reform bill signed by President Bush.

"I am pleased that some companies have taken it upon themselves to include em-ployee stock options on their financial statements and I am also pleased that the FASB has indicated that it will move quickly on a rule for expensing stock options," she told Congress.

Others on Capitol Hill, however, remain concerned that mandatory expensing of employee stock options will discourage their use as a tool to motivate rank-and-file em-ployees.

Because of the "questionable accounting practices" uncovered at some companies recently, "stock options of all types have been tarred by a common brush," Rep. Amo Houghton, R-N.Y., told the House. "In spite of current problems, it is good for both employers and employees if workers are also owners of the business."

Houghton is proposing a new type of stock option targeted to benefit lower-paid non-management employees, and has asked FASB and the Securities and Exchange Commission to exclude these new-breed options from any future expensing mandates.

Under his proposed legislation, in order to qualify for an expensing safe harbor, options would have to be made available to virtually all full-time workers at a company on a non-discriminatory basis. Add-itionally, the option price would have to be set at 100 percent of the market price at the time of the grant, and an annual cap of $11,000 in options per employee would apply.

There would be no tax to the employee at the time of grant or exercise (excluding alternative minimum tax), and the employer’s deduction would be at fair market value at the time of exercise.

The key to the success of the new-breed stock option, according to Houghton, would be its exemption from future expensing requirements. "If we require expensing of such a widely held benefit, employers simply will not offer it," he explained.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access