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Share-based payments rule is finalized, finally.

For all the sturm und drang that has crashed around the stock options expensing issue, the FASB is sailing resolutely ahead. The final rule to require fair-value assessment and expensing of stock options was to be published in December 2004, as a replacement of FAS 123, Accounting for Stock-Based Compensation. The effective compliance date for larger public companies is for periods beginning after June 30, 2005.

The new rule will bring to a close a decade in which the board had effectively allowed--though hardly encouraged--companies to continue to abide by APB 25, Accounting for Stock Issued to Employees (issued in 1972), which permitted use of an intrinsic valuation scheme for options that didn't impact earnings. During that time, the tech bubble drove up the value of options (at least on paper) at many companies to stratospheric heights, only to see untold millions of those options become effectively worthless when the affected stocks collapsed.

Following the issuance of an Exposure Draft last March 31, FASB listened and listened and then listened some more, holding a series of four roundtables in Palo Alto, Calif., and its Norwalk, Conn., headquarters. It considered more than 13,000 comments letters, split fairly evenly between pros and cons; technology companies remain the fiercest critics, with investor letter-writers generally favoring the change.

The accounting board concluded in its various redeliberations that the world needs a common way to fair-value and record option-related expenses. Its final rule will align closely with that formulated last March by the International Accounting Standards Board (IASB) and recognizes that some 500 U.S. companies--many of them household names--have voluntarily elected to expense options since 2002. Two abiding FASB concerns have been the inability for investors to fairly compare companies that expensed options with those that did not and a desire to simplify U.S. GAAP (generally accepted accounting principles) by eliminating rules associated with APB 25.

"Recognizing compensation cost in the financial statements improves the relevance and reliability of that financial information," FASB staff noted in a project summary, "helping users of financial information to understand better the economic transactions affecting an enterprise and to make better resource allocation decisions."

Technically, the first phase of this project addresses accounting for equity-based compensation transactions with employees other than employee stock ownership plans (ESOPs). The second phase will look at issues relating to ESOPs and equity-based compensation arrangements with non-employees.

FASB officials have expressed a clear preference for a binomial or "lattice" approach to modeling option values, rather than the conventional Black-Scholes model in existence for many years, but have not mandated a lattice approach.

The new rule would apply prospectively for fiscal years beginning after Dec. 15, 2004, as if all share-based compensation awards granted, modified or settled after Dec. 15, 1994 had been accounted for using the fair value-based method of accounting. Nonpublic companies using the intrinsic valuation method would be held to the same date, though other private companies would be given until Dec. 15, 2005.
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Title Annotation:financial REPORTING
Author:Marshall, Jeffrey
Publication:Financial Executive
Geographic Code:1USA
Date:Jan 1, 2005
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