FASB Posts Options Rule

At long last, accounting regulators have published their final rule requiring public companies to expense stock options. The question is whether it will stand.

The Financial Accounting Standards Board announced its rule at a press conference Thursday. As expected, it won't take effect until June, and it did not prescribe a specific formula that companies must use to calculate their options costs.

On a conference call, FASB Chairman Robert Herz said the regulation, approved unanimously by the agency's seven-member board, will increase the transparency and comparability of financial statements.

"We believe it will provide investors and other users of financial statements with more complete, unbiased information," Herz said.

But whether companies will have to implement the new standard remains in doubt. Opponents of options expensing have mounted a fierce campaign against the rule in Congress and at the Securities and Exchange Commission, both of which could override it. And some analysts believe that last month's election victory by Republicans could improve the chance that policymakers will block options expensing.

Under existing rules, companies can choose how to value the options they hand out to their employees and executives, either by recognizing their intrinsic value or their fair value. Most have chosen to recognize the intrinsic value of those options. Since most options have a strike price that is equivalent to the market price of the company's shares, that intrinsic value is usually zero, meaning that companies effectively don't recognize any options expense.

But over the past several years, a growing number of companies have chosen to recognize the fair value of options. Using formulas such as the binomial method or the Black-Scholes model, companies calculate the long-term worth of each option they grant and then recognize the aggregate cost as a payroll expense on their income statements.