The Financial Accounting Foundation has decided to take a deep dive into the accounting rules around stock-option expensing to see if they accomplished what the Financial Accounting Standards Board intended when it adopted the controversial standard in 2004.
Financial Accounting Statement No. 123R: Share Based-Payment took effect for most companies in fiscal 2006 to require companies to measure their share-based payment awards to employees under fair value and record the cost of those awards as an expense to earnings. Advocates for users of financial statements said the prior accounting did not reflect the economic value of awards, while critics argued the fair value approach didn't reflect the economics either.
FASB adopted the rule to take effect at the beginning of 2005 for most companies, but preparers and auditors fought hard for delays as they struggled to implement Sarbanes-Oxley. FASB granted a six-month delay, and the Securities and Exchange Commission stepped in with another six-month extension to quiet the uproar. Following implementation, FASB and SEC fielded big questions about how to properly value stock options under the new rules. FAF's Post-Implementation Review team says it will begin a review of FAS 123R to see if it achieved FASB's objective of producing a rule that portrayed the economic exchange when employees are compensated by employers under share-based arrangements.
On a related fair-value note, FAF's review team is already working on an assessment of Financial Accounting Statement No. 157: Fair Value Measurements, to see if it met the rule-making objective as well. FAF says the team has completed its research and will survey stakeholders in September about the application and effectiveness of FAS 157, now contained in the Accounting Standards Codification under Topic 820. The review team expects to share its findings with FASB and FAF in late 2013 or early 2014.
When FAF reviewed rules on business combinations, it found the rules generally achieved the objective, but spotted some concerns about how the rules worked in conjunction with the fair value measurement requirements of FAS 157. Leslie Seidman, then chairman of FASB, told FAF it formed a Valuation Resource Group to address various implementation challenges. She also pointed out the team should take a look at “environmental issues,” such as the intense focus on fair value measurement by the Public Company Accounting Oversight Board, in exploring concerns about cost and complexity of implementing the standards.