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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: jt101 who wrote (184)	8/14/2002 7:55:48 PM
From: hueyone	Respond to of 786

I was expecting FASB to force all companies to expense options, guess I was wrong... As some posters noted, the purpose of this recent FASB meeting was simply to give guidelines to companies that are volunteering to expense stock options now. I suspect the FASB will eventually move towards expensing stock options for all companies. They already made this decision back in 1994 and were forced to back down by Senator Lieberman with the backing of the tech lobby. Eventually I believe the FASB will feel brave enough to make that decision again. Best, Huey

To: jt101 who wrote (184)	8/15/2002 12:46:48 AM
From: jt101	Read Replies (3) \| Respond to of 786

This article is similar in content to the WSJ article posted by hueyone nytimes.com Accounting Board Proposes a New Rule on a Hot Topic: Options. By FLOYD NORRIS y next year, it will not matter very much whether companies choose to report the value of stock options as an expense. Investors will be in a good position to decide for themselves whether the figure is important. The Financial Accounting Standards Board said yesterday that it would propose requiring that the values of options be disclosed in the footnotes of every quarterly financial statement filed with the Securities and Exchange Commission. Until now, those valuations have been buried deep in the footnotes of annual reports, with no quarterly update required. As a result, investors who cared about options had no certain measure of the quarterly effect. But the proposed new rule, which the board hopes to put out for comment by the end of September and then issue in time to take effect by the end of the year, would require more prominent disclosures in annual reports and the first disclosures in the quarterly reports. The only way it would be any easier for investors to obtain option figures would be for the S.E.C. to require such disclosures in quarterly earnings news releases, which sometimes come out weeks before quarterly statements are filed with the commission. Robert K. Herdman, the S.E.C.'s chief accountant, could not be reached for comment on that issue yesterday. Since 1995, companies have had the right to decide whether to report the value of options as an expense, and nearly all have chosen not to do so. Those companies then had to disclose the value of options in annual financial statement footnotes, but it is not clear how much those disclosures were noticed by investors. In the last two months, with stock prices down and the integrity of corporate financial reporting under question, a number of companies have said they will begin recording options as an expense. The accounting board said yesterday that it would offer those companies three choices of accounting when they make the switch. They can conform to the current rule, so that the full effect of the change on earnings will gradually be felt over several years. Or they can take the full effect in the year the change is made, but not restate results for previous years. Or they can restate results for the previous three years, a move that would make the new numbers more comparable. The wide range of choices reflects the fact that under the option-expensing rule, the value of options is calculated when they are issued but not applied to the expense statement until the options can legally be exercised, typically a three- or four-year period. For example, if a company issued options today that were good for 10 years, they might vest in equal amounts over the next four years. If the value of each option was calculated at $10, using an options-pricing model like Black-Scholes, and 10,000 options were issued to an employee, the total reported expense would be $100,000, with $25,000 taken the first year and the same amount in each of the following years. Of course, the options might be very valuable after a year if the share price soared, or they might be all but worthless if the share price collapsed. But the rules figure that the proper time to value them is when they are granted. Opponents of recording options as an expense note that they cost the company no cash and say they just redistribute shareholders' equity from existing shareholders to those who cash in their options. That argument has been cited by several companies that have declined to go along with the trend of treating options as an expense. They generally are among the more generous issuers of options and would have to take larger hits to earnings if they changed their accounting. It is also likely, although not certain, that by 2004 or 2005 the International Accounting Standards Board will have adopted rules requiring the switch, albeit with details that differ slightly from the American rule The American board has said that it will then consider whether to require American companies to conform to the international rule, a decision that would force all companies to report option values as an expense. But even before that, when the quarterly disclosures are required, companies will have to decide whether to change their options policies. Some analysts expect that companies will reduce the number of options issued, particularly to more junior employees, to make earnings look better. Others suggest that companies might use different types of incentive plans, involving either grants of restricted stock or of options tailored to reward extraordinary performance. Such awards must already be treated as an expense, which has served as an incentive to issue the only options with favorable accounting — those that pay off if the stock's market price rises over a decade, regardless of the reason for the rise.