FASB revises position on stock options.After more than a year of unrelenting pressure from politicians, business and CPAs both in public practice and in commerce and industry, the Financial Accounting Standards Board Financial Accounting Standards Board (FASB)
Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP). decided against mandating that companies report the value of employee stock options as an expense. According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the board, it will "work toward improving disclosures...rather than requiring an expense charge for all options." (The article "Employee Stock Option Accounting Changes" (JofA, Jan.95, page 72) went to press before the FASB FASB
See: Financial Accounting Standards Board
See Financial Accounting Standards Board (FASB). decided to reverse its position.)
"No matter how hard we tried to convince people of the correctness of our stand," FASB Chairman Dennis R. Beresford told the Journal, "there simply was not enough support for the notion of requiring expense recognition."
Accounting for stock-based compensation has been on the FASB project list since 1984 because of inconsistencies in the authoritative literature. In June 1993, having decided that the issuance of stock options for employee services indeed results in compensation expense that should be recognized, the board issued an exposure draft, Accounting for Stock-based Compensation.
The ED, which would have required expense recognition for virtually all employee stock option plans, met with vociferous opposition in comment letters, public hearing testimony and the press. In mid- mid-
Middle: midbrain. 1994 the board announced it would not require 1994 financial statements to show a valuation for options granted that year.
The board stated that it "expects to encourage, rather than require, companies to adopt a new method that accounts for stock compensation awards based on their estimated fair value at the date they are granted." If a company chooses not to record these awards as an expense, however, it would have to disclose in a footnote Text that appears at the bottom of a page that adds explanation. It is often used to give credit to the source of information. When accumulated and printed at the end of a document, they are called "endnotes." to the financial statements what the effect on net income would have been had the company recognized the expense for them based on FASB-specified guidelines guidelines,
n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. .
An important objective, according to Diana W. Willis Wil·lis , Thomas 1621-1675.
English anatomist and physician known for his studies of the nervous system and the brain. He discovered the circle of Willis at the base of the brain. , FASB project manager, "was to eliminate the bias against variable plans, such as option plans with terms that change based on company performance." Current rules require expense charges for many of these, she said, while no expense is recognized for otherwise similar fixed plans. The new accounting method would eliminate this bias.
The FASB expects to issue either a final standard or another ED for public comment, probably in the second quarter of 1995. No effective date for a new standard has been set.
"Companies will have a choice," Beresford said. "They can either follow what we think is the preferred accounting and charge the value of the option to the income statement or use their current accounting and disclose in a footnote what the effect on income would have been. "This will permit potential investors and other financial statement users to compare companies that use the new accounting with companies that don't.
"The AICPA's response to the FASB's proposal reflected real concern with the ability to measure the compensation well enough to include it as an expense in the income statement, but the Institute supported disclosures," said G. Michael Crooch, a partner of Arthur Andersen For the U.S. Supreme Court case commonly known as Arthur Andersen, see .
Arthur Andersen LLP, based in Chicago, was once one of the "Big Five" accounting firms (the other four are PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young and KPMG), performing LLP LLP - Lower Layer Protocol , Chicago, and chairman of the AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). accounting standards executive committee. "I think the FASB's position is a reasonable compromise. They listened to the constituents and are allowing companies to put the information only into the footnote and not have to subtract A relational DBMS operation that generates a third file from all the records in one file that are not in a second file. it from income. This approach will provide the information investors want but will not have the significant impact on income that many people believed was inappropriate. I also support the FASB's decision because it will allow them to bring this issue to a close."
"We have been setting standards for 21 years and have faced pressure on a high percentage of them," Beresford said. "We have always done what we believed was the right thing, and we'll continue to do so."