FASB And SEC Hint At Option Expensing Delay

Both the Securities and Exchange Commission and the Financial Accounting Standards Board hinted last week that the proposal to expense options may be delayed.

The first comments came from SEC Chief Accountant Donald Nicolaisen, who said last week that he was open to the idea of giving companies another year before they would have to begin expensing stock options.

“If the standard becomes final, I am sympathetic to considering a potential delay in implementation to 2006,” Nicolaisen told Dow Jones during a recent FASB roundtable.

Nicolaisen

At the same roundtable, FASB Chairman Robert Herz also acknowledged that a delay may be in order.

“We need more time,” Herz was reported to have stated. “We are hearing people say they are stretched to the maximum.”

FASB Board Member G. Michael Crooch apparently showed the same inclination. “We will certainly take requests for delay into consideration,” he told a reporter at The Deal.

Herz

Besides the political opposition to the Board's proposal—a bill recently cleared the House Financial Services Committee that would dilute the plan significantly—a key issue for many companies is the complexity of the methods for valuing stock options as articulated in the FASB plan.

According to the proposal, there are several valuation techniques that can be used to accurately determine the fair value of employee stock options, but "lattice" models are preferred becaus they can accommodate variable factors such as dividends and volatility over the option's contractual term.

Crooch

Another issue may be the volume of the comments received by the FASB. Though Crooch noted that comments could play a role in a delay, most of the comments are "form letters" written by employees of technology companies like Cisco. Compliance Week has covered this issue in the past, and a related note is available from the box above, right.

Another factor that could cause a delay is the fact that companies are complaining of being overwhelmed with regulatory requirements. In addition, the SEC and FASB not only need to agree on a final standard, but they would be expected to provide implementation guidelines, much as the Commission has done regarding Section 404 of Sarbanes-Oxley.

The proposed FASB rule, which would require U.S. companies to count stock options as expenses, would theoretically go into effect next year, but must first be approved by the SEC.