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FASB issues proposal on stock option compensation.

The Financial Accounting Standards Board issued proposed standards for stock-based compensation plans.

The proposal, Accounting for Stock-based Compensation, requires companies to recognize an expense for all stock-based compensation awards, including stock options, granted after December 31, 1996. The expense will be measured as the award's fair value at the grant date and will be recognized over the vesting period. The proposal does not specify the type of option-pricing model to be used but provides guidance for selecting the assumptions to be used with the model.

Beginning in 1994, companies will be required to disclose the effect of the recognition requirements on net income and earnings per share in notes to financial statements as if they had been adopted. The delay in the proposal's recognition provisions should allow employers to become accustomed to option-pricing models and financial statement users to familiarize themselves with the new information.

Michael P. Bohan, regional center controller for BP America, Inc., said, "The FASB has the right idea in recognizing stock options as compensation but the wrong measurement approach. In using the option grant date to measure the value of the award, the FASB does not recognize the contingent nature of the compensation, which fluctuates with the value of the underlying stock." Bohan's approach, which he admits "is not really popular," would be to calculate the award's final value at the exercise date, when all factors are known. However, between the grant date and the exercise date interim estimates of option value could be made and compensation expense could be recognized.

Comments on the proposal are requested by December 31. During the comment period, the FASB will conduct a field test of the proposal with KPMG Peat Marwick. Public hearings will be held on the proposal in early 1994. Copies of the proposal are available from the FASB, P.O. Box 30816, Hartford, Connecticut 06150. Telephone: (203) 847-0700, ext. 555.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1993
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