FASB Says Firms Can Expense Cost of Options When They Vest

Companies that award stock options would be allowed to deduct their cost from profit based on when employees receive them rather than when they are granted, the Financial Accounting Standards Board ruled Wednesday.

The decision, part of the board’s process of developing final rules on the issue by next year, means Intel Corp., Cisco Systems Inc. and other frequent users of stock options could expense the cost of those that vest with employees instead of the total amount awarded. Options typically vest over a three- or five-year period, after which they can be exercised.

Many technology firms have opposed expensing options, saying the practice makes their financial statements less meaningful because options are difficult to price.

Proponents of formal options-expensing, such as billionaire investor Warren Buffett, say options are a cost and should be recognized as such.

“Waiting until they vest will reduce by quite a bit the amount that companies will have to expense,” said Charles Mulford, an accounting professor at Georgia Institute of Technology. “I’m not sure I agree with that.”

FASB adopted a method for expensing known as the modified grant-date measurement approach. Under the method, the options are valued as of the date they are granted, but that value is adjusted to reflect options that don’t vest because employees leave the company or performance goals are not met.

Wednesday’s ruling by FASB, the board that writes U.S. accounting rules, is a less strict approach than that of the International Accounting Standards Board. The IASB’s proposed rule would require companies to expense options based on their value on the date they are awarded.

FASB decided earlier this month that options are a compensation expense that should be recognized on a company’s financial statement. The decision followed last year’s rash of corporate scandals, some of which involved stock option abuses.

FASB Chairman Robert Herz has said he expects the board to release a draft rule on accounting for options as an expense for public comment by the end of this year. He said he doesn’t know whether political opposition will delay the board’s work.

“We’re going to continue to do our own work in our usual thorough, due process kind of way,” Herz said. “We’re looking for light rather than heat.”

Herz will hear opposition to expensing options today when he travels to Washington for a discussion on the issue hosted by Sen. Mike Enzi (R-Wyo.).