In a final statement on a stock-options rule, the Financial Accounting Standards Board says that
companies must treat employee stock options as an expense on financial statements
beginning in 2005.
The board says the new rule will provide investors with more complete and neutral
financial information by requiring that the compensation cost relating to stock
options be recognized in financial statements. That cost will be measured based
on the fair value of the equity.
The regulation is the result of a two-year effort to respond to requests from
investors and many others that the FASB improve the accounting for employee
"Recognizing the cost of share-based payments in the financial statements
improves the relevance, reliability, and comparability of that financial information
and helps users of financial information to understand better the economic transactions
affecting an enterprise and supports resource allocation decisions," says
Michael Crooch, a board member.
Public companies (other than those filing as small business issuers) will be
required to apply the rule as of the first interim or annual reporting period
that begins after June 15, 2005. Public companies that file as small business
issuers will be required to apply the rule in the first interim or annual reporting
period that begins after December 15, 2005. Private companies will be required
to apply it at the beginning of the first annual reporting period after December
Currently, approximately 750 public companies in the U.S. are voluntarily applying
the rule's fair-value-based method of accounting for stock options or have announced
plans to do so, according to the board.
However, many companies lobbied against the rule, saying it will make it more
difficult for them to use stocks options in their efforts to recruit and retain