NEWS RELEASE 07/31/02
FASB's Plans Regarding the Accounting for Employee Stock Options
Norwalk, CT, July 31, 2002—The accounting for employee
stock options has received renewed attention in recent months. Over
the past few weeks there have been two important developments.
- Several major U.S. companies have announced their intentions
to change their method of accounting for employee stock options to
an approach that recognizes an expense for the fair value of the
options granted in arriving at reported earnings. We understand
that a number of other companies also are considering adopting
that method. The FASB applauds those companies because recognizing
compensation expense relating to the fair value of employee stock
options granted is the preferable approach under current U.S.
accounting standards (FASB Statement No. 123, Accounting for
Stock-Based Compensation). It also is the treatment advocated
by an increasing number of investors and other users of financial
statements. When the FASB developed FAS 123 in the mid-1990s, the
Board proposed requiring that treatment because it believed that
this was the best way to report the effect of employee stock
options in a company’s financial statements. The FASB modified
that proposal in the face of strong opposition by many in the
business community and in Congress that directly threatened the
existence of the FASB as an independent standard setter. Thus,
while FAS 123 provides that expense recognition for the fair value
of employee stock options granted is the preferable approach, it
permitted the continued use of existing methods with disclosure in
the footnotes to the financial statements of the pro forma effect
on net income and earnings per share as if the preferable, expense
recognition method had been applied. Until now, only a handful of
companies elected to follow the preferable method.
- The International Accounting Standards Board (IASB) has
concluded its deliberations on the accounting for share-based
payments, including employee stock options, and announced plans to
issue a proposal for public comment in the fourth quarter of 2002.
That proposal would require companies using IASB standards to
recognize, starting in 2004, the fair value of employee stock
options granted as an expense in arriving at reported earnings.
While there are some important differences between the
methodologies in the IASB proposal and those contained in FAS 123,
the basic approach is the same—fair value measurement of employee
stock options granted with expense recognition over the vesting
period of the options.
The FASB has been actively working with the IASB and other major
national standard setters to bring about convergence of accounting
standards across the major world capital markets. The Board has been
closely monitoring the IASB’s deliberations on share-based payments
and urges all interested parties to submit comments to the IASB on
its proposal once it is released later this year. Additionally, the
FASB plans to issue an Invitation to Comment summarizing the IASB’s
proposals and explaining the key differences between its provisions
and current U.S. accounting standards. The FASB will then consider
whether it should propose any changes to the U.S. standards on
accounting for stock-based compensation.
In the meantime, in response to requests by companies considering
switching to the preferable method under FAS 123, the FASB also
plans to consider at its August 7 public meeting whether it should
undertake a limited-scope, fast-track project relating to the
transition provision in FAS 123. Literally applied, the existing
transition provision in FAS 123 would require companies that elect
to change to the preferable method to do so prospectively for stock
options granted after the date of the change. This transition
provision was appropriate when FAS 123 was issued in 1995 because,
at that time, companies did not have valuation information available
relating to previous grants of employee stock options. However, that
is no longer the case given the disclosure requirements that have
now been in effect since 1995 under FAS 123.
About the Financial Accounting Standards Board
Since 1973, the Financial Accounting Standards Board has been the
designated organization in the private sector for establishing
standards of financial accounting and reporting. Those standards
govern the preparation of financial reports and are officially
recognized as authoritative by the Securities and Exchange
Commission and the American Institute of Certified Public
Accountants. Such standards are essential to the efficient
functioning of the economy because investors, creditors, auditors
and others rely on credible, transparent and comparable financial
information. For more information about the FASB, visit our website
at www.fasb.org.
The Financial Accounting Standards Board
Serving the investing public through transparent information
resulting from high-quality financial reporting standards developed
in an independent, private-sector, open due process.
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