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FASB Considers Revised Stock Option Rules, Releases FAS 148

The Financial Accounting Standards Board in the USA may take another look at requiring companies to count stock option expenses in income statements.

“Timing may be favorable for the FASB to propose change,” said spokeswoman Sheryl Thompson. After the rash of business scandals in 2002, the public, she said, is more interested in what was once seen as a rather arcane financial issue.

The FASB first proposed that companies should automatically count the options as income in the mid-1990s, but a group of businesspeople and elected officials — including U.S. Sen. Joseph I. Lieberman, D-Conn. — opposed the plan. Lieberman, in an interview last year with the Connecticut Post, said that kind of accounting would hurt developing companies, particularly technology businesses, that depend upon options to attract high quality employees. In a compromise, the FASB published Statement No. 123, which gave companies the choice of either counting the options in the income statement or including them in footnotes within the annual report. Most companies opted for the latter choice, said Thompson.

“Unfortunately, many investors apparently don't look at the financial section of the annual report,” she said.

In 2002, many companies, including Coca-Cola and General Electric, started expensing the options in their income statements. But that, said Thompson, led to worries about a “ramping up” in expenses.

Essentially, she said, companies were worried that investors would see a sudden rise in expenses compared to the previous year because of the accounting change. So Tuesday, the FASB amended that statement with Statement No. 148, which, Thompson said, provides “transition guidance” to companies to avoid the appearance of a “precipitous rise” in expenses. This was done as an interim step rather than a full revision of the rules.

“It really isn't recommending any one set method,” she said, but rather presents two options.

The first, she said, is that, “You can go back and restate everything,” so the expenses for previous years reflect options.

The other, she said, is a “modified prospective” approach; the prospective option let companies use the footnotes. Both options immediately reflect the full stock option expense.

“It will be a better presentation of the data,” she said of the new choices, because both make the option expense data more transparent and more prominent by setting the figures in a table format, as well as in the footnotes. Both the Securities and Exchange Commission and the American Institute of Certified Public Accountants recognize FASB standards as authoritative, so companies will be able to use these choices in the year-end financial reports that come out early in 2003.

The FASB, said Thompson, has also put out an “invitation to comment,” in an effort to gauge interest and understanding in the similarities and differences between the U.S. standards and those of the International Accounting Standards Board.

“We want to narrow the differences” between international and U.S. accounting methods, she said.

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