Companies Must Expense Stock Options
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The nation’s accounting rulemaker decided recently that companies will have to begin deducting the value of stock options from their profits next year, reining in a cheap way to compensate workers that had been abused by executives and clouded earnings.
The move was cheered by shareholder advocates but scorned by many companies that rely heavily on options to beef up compensation packages.
The Financial Accounting Standards Board’s decision calls for public companies to start expensing options beginning with their first fiscal reporting period after June 15, 2005. Private companies and companies that file as small business issuers are not required to comply until after December 15, 2005.
FASB Chairman Robert Herz said the new rules “provide investors and other users of financial statements with more complete and unbiased financial information.”
Rules for accounting for stock options have pitted the technology industry, which relies on options to attract and retain employees, against some highly influential officials advocating expensing options, including Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson, billionaire investor Warren Buffett, and the Big Four accounting firms.
Stock options are perks given to employees that allow them to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference.
Many employees of companies like Microsoft Corp. and America Online famously became millionaires in the 1990s thanks to stock options.
Under current accounting standards, a company’s cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the income it reports to investors.
The new rules will force companies to subtract the option expense from earnings, which could dramatically knock down profits at several companies.
So far, about 850 companies – including about 120 members of the S&P 500 – have begun or agreed to begin expensing options, according to research from Bear Stearns.
