FASB amends stock-option expensing statement

Internal Auditor, Feb, 2005 by J. Hodgfs

THE U.S. FINANCIAL Accounting Standards Board (FASB), a private-sector organization that establishes standards of financial accounting and reporting, recently released a revision of Statement No. 123, Accounting for Stock-based Compensation, originally issued in 1995. The new version, Statement No. 123(R), Share-based Payment, requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. Compensation cost will be measured based on the fair value of the equity or liability instruments issued.

The standard provides investors and other users of financial statements with more complete and neutral financial information. Michael Crooch, a FASB board member, says of the project, "Recognizing the cost of share-based payments in the financial statements improves the relevance, reliability, and comparability of that [company's] financial information. [It also] helps users of financial information to understand better the economic transactions affecting an enterprise and supports resource allocation decisions."

Statement 123(R) covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. In addition, it includes an implementation appendix that provides expanded guidance on measuring the fair value of share-based payment awards.

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With the exception of small-business issuers, public companies will be required to comply with Statement 123(R) as of the first annual reporting period after June 15, 2005. Small business issuers and nonpublic companies have until the first annual reporting period after Dec. 15, 2005.

During the exposure phase, FASB held 60 public meetings; conducted field visits with companies and employee benefit consultants; held public roundtables; consulted with numerous valuation experts, companies, auditors, and many others; and reviewed thousands of comment letters from interested parties. The full text of the statement and its related appendices can be found at www.fasb.org.