The nation’s accounting rulemaker decided Thursday that companies will have to begin deducting the value of stock options from their profits next year, a move cheered by shareholder advocates but scorned by many companies who rely heavily on options to beef up compensation packages.
The Financial Accounting Standards Board’s long-awaited decision means public companies will have to start expensing options beginning with their first annual reporting period after June 15, 2005.
FASB chairman Robert H. Herz said the new rules will “provide investors and other users of financial statements with more complete and unbiased financial information.”
FASB did not specify a particular method of valuing options, or the formulas companies use to assign costs to the options.
The new rules have pitted the technology industry, which relies on options to attract and retain employees, against some highly influential officials who advocate expensing options, including Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson, billionaire investor Warren Buffett and the Big Four accounting firms.
Stock options are perks given to employees that allow them to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference.
Many employees of companies like Microsoft Corp. and America Online famously became millionaires in the 1990s thanks to stock options.
Under current accounting standards, a company’s cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the net income it reports to investors.
The new rules will instead force companies to subtract the option expense from earnings, which could dramatically knock down profits at some companies.