New York (Sept. 3, 2004) -- Accounting standards-setters backed away from favoring one method for valuing stock options and settled a major issue related to a controversial plan to mandate stock option expensing this week, opting to let companies decide what valuation method they use, according to published reports.
The issue of how to value options has been a hot-button issue in the debate over whether companies should be required to treat the stock options they grant to employees as an expense. Critics of mandatory expensing have argued that none of the current methods value options appropriately.
At a meeting Wednesday, members of the Financial Accounting Standards Board decided not to indicate in their final standard on expensing that any particular valuation model is preferable to another, according to reports. Instead, companies will have to decide for themselves which method to use, a shift from the board's position in its March exposure draft, in which the board singled the lattice, or binomial, approach as a "preferable" method for estimating options' fair value. That model is said to incorporate more data than the popular Black-Scholes model.
The change was reportedly based on feedback from comment letters from companies and auditors, who said that they shouldn't be bound to just one model, but who felt that by stating a preference, the board was effectively doing just that.
"Some accounting firms have told their clients that the explicit preference for a lattice is effectively a requirement," Newsday quoted a FASB staff report as saying.
The board is expected to issue a final rule by the end of the year, with mandatory exposing to take effect for most companies in 2005. However, the board is considering delaying the rule based on concerns that companies need more time because they are busy implementing new financial control systems required by Sarbanes-Oxley, according to reports.
-- WebCPA staff
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