Academic journal article Journal of Accountancy

FASB Revises Position on Stock Options

Academic journal article Journal of Accountancy

FASB Revises Position on Stock Options

Article excerpt

After more than a year of unrelenting pressure from politicians, business and CPAs both in public practice and in commerce and industry, the Financial Accounting Standards Board decided against mandating that companies report the value of employee stock options as an expense. According to the board, it will "work toward improving disclosures...rather than requiring an expense charge for all options." (The article "Employee Stock Option Accounting Changes" (JofA, Jan.95, page 72) went to press before the FASB decided to reverse its position.)

"No matter how hard we tried to convince people of the correctness of our stand," FASB Chairman Dennis R. Beresford told the Journal, "there simply was not enough support for the notion of requiring expense recognition."

Accounting for stock-based compensation has been on the FASB project list since 1984 because of inconsistencies in the authoritative literature. In June 1993, having decided that the issuance of stock options for employee services indeed results in compensation expense that should be recognized, the board issued an exposure draft, Accounting for Stock-based Compensation.

The ED, which would have required expense recognition for virtually all employee stock option plans, met with vociferous opposition in comment letters, public hearing testimony and the press. In mid-1994 the board announced it would not require 1994 financial statements to show a valuation for options granted that year.

The board stated that it "expects to encourage, rather than require, companies to adopt a new method that accounts for stock compensation awards based on their estimated fair value at the date they are granted." If a company chooses not to record these awards as an expense, however, it would have to disclose in a footnote to the financial statements what the effect on net income would have been had the company recognized the expense for them based on FASB-specified guidelines.

An important objective, according to Diana W. …

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