New FASB Treatment of Stock Options

From the Summer 2004 Issue of the Technology Law Bulletin

The Financial Accounting Standards Board recently circulated an exposure draft of a proposed Statement of Financial Accounting Standards. If adopted, the new standards will dramatically alter the accounting treatment of compensatory stock options. At present, the grant of most stock options results in no accounting charge. Under the new accounting rules, public companies will have to value the options on the date of grant and expense that amount over the vesting period (the “fair value method”). Non-public companies will have a choice of using either the fair value method or the “intrinsic method,” which effectively requires any increase in value of the underlying stock during the vesting period to be expensed each year. While these proposed rules are already reducing the popularity of stock options in some circles, the good news is that greater creativity in plan design will be possible as the prior accounting constraints will be removed. If adopted, the new rules will take effect for fiscal years beginning after December 15, 2004 for public and certain non-public companies and December 15, 2005 for all other companies. Most practitioners believe that adoption of these rules is virtually certain although there may be some limited changes made before adoption.