Morris Manning & Martin, LLP

FASB Issues Final Statement on Accounting for Stock Options

The Financial Accounting Standards Board ("FASB") on October 23, 1995, issued final rules for accounting for stock option compensation. These final rules spell general victory in the opposition against the FASB's efforts to require accounting expense recognition for all accounting awards. 

In FASB statement No. 123, "Accounting for Stock-Based Compensation," the FASB encourages companies to account for stock compensation awards based on the fair value with a date the awards are granted. The resulting cost would be recorded as an expense to the income statement. 

Under the new announcement, however, companies can choose not to apply the new grant-based accounting method and continue to apply the old rules under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Following the old rules generally resulted in reporting no compensation cost for most fixed stock option plans. 

Entities that elect not to record an awards compensation cost will be required to disclose in footnotes what the value of the stock plan would have been had the company followed FASB's Statement No. 123. 

The principal objective of the FASB is accomplished with the adoption of FASB Statement No. 123. Under previously existing rules, "variable stock award plans" such as those that vary based upon the financial performance of a company, generally resulted in a charge to compensation expense, while no such expense was charged for the grant of fixed awards. Under the new rules, even if a company opts not to change to the new accounting method, the required footnote disclosures will permit financial statement users to compare with the disclosure of companies that elect FASB Statement No. 123. 

In adopting the new rule, numerous issues were discussed, resulting in disagreement among the members of the FASB.