FASB Delays Start Date For Expensing Stock Options

Last week, the Financial Accounting Standards Board delayed the effective date of its intended stock option expensing requirements by six months, giving compliance-weary companies and auditors more time to digest and implement new standards. At the same time, FASB members also reviewed and rejected a proposal issued by a handful of technology companies regarding how stock options should be valued.

While FASB was originally on course to adopt the stock option expensing standard by year’s end and put it into effect immediately, the Board decided at its Oct. 13 meeting to delay the effective date until after June 15, 2005. A FASB spokesman characterized the decision as “a difficult balancing act.”

The FASB has been under fire on all fronts over the expensing of stock options. Investor advocates want options expensed as soon as possible to give investors a better picture of financial performance. Opponents have argued expensing will hamper their ability to operate competitively. Congress even has intervened; the House passed a bill to override FASB’s intent, but the Senate measure is stalled in committee. SEC officials have supported expensing, but have pressed for more time because companies already are consumed with meeting Sarbanes-Oxley requirements.

Beier

Raymond Beier, national technical services leader with PricewaterhouseCoopers, said companies in the marketplace are operating at full capacity to ensure they comply with the internal control provisions of SOX Section 404, which goes into effect beginning Nov. 15.

“The focus companies have in the marketplace today is to get [Section] 404 right,” Beier said. “In a world of limited resources, it was the right decision.”

In addition to delaying the effective date of the standard, FASB also decided at the same Oct. 13 meeting to dismiss the suggestion of a group of technology companies to change the way FASB plans to provide for the valuation of stock options.

Representatives of Cisco, Qualcomm and Genentech proposed to FASB a valuation method that they said is based on fair value principles, but adjusted to account for various hard-to-measure volatility factors. Critics have characterized the method as an attempt to derail FASB’s efforts, or at least reduce the expense that would be reported.

“It was a ridiculous way to calculate the value and expense of the options involved,” said Kurt Schacht of the CFA Institute. “FASB did exactly what it should have done, which is to reject it.”

FASB’s focus going forward will be to finalize the valuation provisions. The Board is still on target to issue the final standard by the end of the year.

Details on the FASB proposal, including the actual proposal and the latest Board update and supporting documents. Are in the box above, right. Also available are details on the technology companies’ proposal pitched to—and rejected—by FASB.

FASB Appoints New Board Member

In other news, the Financial Accounting Foundation—which is responsible for overseeing and funding the FASB—appointed Donald M. Young to the Board. Young will complete the term of Gary Schieneman, who has resigned.

Schieneman

Schieneman provided no reason for his early departure and no description of his future plans. He has been credited with spearheading FASB’s User Advisory Council, for which he served as chairman. The council was formed in 2002 to increase analyst participation in the standard-setting process.

Young, whose appointment becomes effective Jan. 1, 2005, is managing director of Young & Company, which provides consulting and research services to technology and private equity clients. He is a former managing director with PaineWebber/UBS, where he served primarily as a technology analyst. His term will run through June 30, 2008.

European Union Adopts Amended International Standard

In a controversial move last week, the European Union’s Accounting Regulatory Committee voted to adopt a modified accounting standard for valuing financial instruments that run contrary to International Accounting Standards Board recommendations. The standard, a

modified version of International Accounting Standard No. 39—officially titled “Financial Instruments: Recognition and Measurement”— has raised frustrated European standard setters and convergence advocates who claim the removal of certain provisions creates a “watered down” version of IAS 39.

The EU committee amended the standard to allow more liberal interpretation of rules regarding fair value and hedge accounting. The Accounting Standards Board of the UK’s Financial Reporting Council criticized the action, saying the EU amendments politicize the standard-setting process and confound efforts to converge to international standards. The UK board is also recommending companies adhere to the more narrow international standard.

Details are available from the box at right.