FASB Publishes Options Draft

Updated from 10:03 a.m. EST

The Financial Accounting Standards Board rejoined the battle to put the cost of stock options plainly in view of investors Wednesday, formally releasing a draft of a new rule on equity compensation that is already meeting opposition from the technology sector and in Congress.

The proposal has two main elements: that publicly traded companies be required to use a fair-value method of valuing options from the date they granted to employees, and that the value be subtracted as a business expense on companies' income statements. At present, the cost of stock options must be estimated only in footnotes that append federal filings, where employers are allowed to use a much simpler technique than fair value to reckon the cost.

The bulk of the proposal deals with the methodology behind fair-value pricing of options granted to employees, which, because of their longer exercise periods and non-transferability, act differently from options traded in public markets. FASB decided to prescribe the use of models that consider an option's price relative to the underlying stock and an estimate of the stock's volatility to arrive at a fair-value expense, the most famous of which is the Black-Scholes formula. ...