U.S. companies ordered to expense options

In a move that may be seen by some in corporate America as an early lump of coal in many Christmas stockings, the Financial Accounting Standards Board (FASB) will require companies to report the cost of stock options in their financial statements beginning next year, it announced Thursday.

Public companies are to start expensing options beginning with their first fiscal reporting period after June 15, 2005, while private companies and small businesses will be required to comply after Dec. 15, 2005, the Norwalk, Connecticut-based U.S. financial accounting standards group said.

Representatives of the FASB could not immediately be reached for comment.

According to the FASB, the new rules are aimed at providing investors and other users of financial statements with more complete and unbiased financial information. But the International Employee Stock Options Coalition was quick to characterize the move as neither workable, reliable, nor auditable. The group, which is composed of trade associations and companies including Cisco Systems and Intel, said in a separate statement released Thursday that the new rules will harm the 14 million U.S. workers who receive stock options, the vast majority of whom are not managers.

Option grants, which have lost much of their appeal since the Internet bubble burst in 2000, allow employees to buy company shares at a fixed price. IT companies in particular have used the potential for a big compensation gain through soaring share prices as a lure to current and potential employees. For example, employees of large companies such as Microsoft and Yahoo famously beefed up their personal bottom lines in the late 1990s through their stock options.

The FASB announced in April that it was considering changing its rules to require companies to record all stock-based employee payments, including options, as an expense.

Along with stock options, the rule change will affect other share-based compensation, including restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans, the FASB said.

Currently, rather than deducting the cost of issuing stock options from the income it reports to investors, a company only needs to disclose those costs in a footnote to its financial statement. Should companies be compelled to subtract the option expense from earnings, analysts have predicted that a number of corporations could see a negative knock-on effect to their profits.

About 750 public companies in the U.S. are voluntarily applying the FASB’s fair-value-based method of accounting for share-based payments or have announced plans to do so, the FASB said.