After two years of deliberation, FASB ruled in mid-December that companies must begin expensing for stock options given to employees as part of compensation packages.

FASB Statement No. 123(R), Share-Based Payment, will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued.

This Statement is the result of a two-year effort to respond to requests from investors and many others that the FASB improve the accounting for share-based payment arrangements with employees.

Said Michael Crooch, FASB Board member and Board collaborator on the project, “Recognizing the cost of share-based payments in the financial statements improves the relevance, reliability, and comparability of that financial information and helps users of financial information to understand better the economic transactions affecting an enterprise and supports resource allocation decisions.”

Public entities (other than those filing as small business issuers) will be required to apply Statement 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. Public entities that file as small business issuers will be required to apply Statement 123(R) in the first interim or annual reporting period that begins after December 15, 2005. The FASB decided to provide nonpublic entities additional time to prepare for the implementation of Statement 123(R). Those entities will not be required to apply Statement 123(R) until the beginning of the first annual reporting period after December 15, 2005.

Statement 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans.

In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, Statement 123(R) includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of share-based payment awards. In developing that guidance, the FASB included several special measurement provisions for private companies designed to ease implementation. The implementation guidance also includes numerous examples illustrating the accounting for common types of share-based payment arrangements.

Currently, approximately 750 public companies in the U.S. are voluntarily applying Statement 123’s fair-value-based method of accounting for share-based payments or have announced plans to do so. The International Accounting Standards Board, whose standards are followed by companies in many countries around the world, and the Canadian Accounting Standards Board have previously issued accounting standards requiring entities in their respective jurisdictions to recognize the cost of employee services received in share-based payment transactions in financial statements.

FASB Statement 123(R) and related appendices are available on FASB’s web site.

In a printed statement, SEC Chief Accountant Donald Nicolaisen encouraged early adoption and said the SEC staff will evaluate implementation of the new standard and is preparing to provide appropriate guidance to assist preparers of financial statements.

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