Now that the accounting rule-makers in Norwalk have issued their final rule mandating that companies expense at fair value the stock options that they grant to their employees, the real fun has just begun.
After two years of watching the Financial Accounting Standards Board and its supporters duke it out with members of Congress and the high-tech companies that oppose the rule, which will mandate that companies move options from the depths of financial footnotes and onto their income statements as an expense, we're probably going to get six more months of the same, since the rule doesn't take effect for public companies until the middle of next year, thanks to a decision to delay the effective date by six months. (For private companies and small business issuers, the standard will apply for fiscal years beginning after Dec. 15, 2005.)
That means six more months of hearing critics of the rule urging the Securities and Exchange Commission to reject the rules by arguing that the board's plan is flawed and that the issue needs more study, and another six months of political heavyweights on the other side of the debate urging Congress -- which made overtures to block the board's final rule by passing a diluted options expensing measure that would require companies to expense options given to their top five executives -- to leave the rulemaking to the board.
Unlike the last time the FASB and Congress had a showdown on stock options, back in the mid-90s, when the board backed down after lawmakers threatened its funding, things are somewhat different this time around. Thanks to Sarbanes-Oxley, FASB is now funded through mandatory annual fees on public companies and accountants, rather than by voluntary contributions.
Of course, that doesn't mean that the board isn't in for a fight. Opponents of the rule are already promising to marshal their forces for another face-off.
Either way, at least one faction has cause to celebrate. Even before it takes effect, the FASB rule is bound to be a boon for those firms with large valuation practices. Since FASB ultimately left it up to companies to decide on their own how to value the options (with guidance of course), you can bet that valuation methodologies are going to come under scrutiny by regulators -- who will be keeping a close eye on how firms conclude what those options are worth -- and by the auditors that will be signing off on the financial statements that contain those valuations. Companies will not only have to decide which method to use, they'll need to be able to back up their choice to auditors, regulators and the investing public, which means valuation experts are going to be very busy in the coming months, as companies prepare to adopt the rules. According to FASB, about 750 public companies in the U.S. are already expensing options voluntarily or have announced plans to do so. And many more are likely to follow suit now that the board has handed down the final rule.
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