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December 17, 2004
Board: Stock Options Must Be Treated as Expenses

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.

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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 stock options.

"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 15, 2005.

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 workers.

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