manyanalystsandinvestorswhostillrelyontheproverbial
bottom line, which is accounting earnings. They will
presumablygetabettersenseoftherealearningspotentialif
employee options are expensed.
Theprotestationsandthelobbyingpowerofthosewhohave
arguedagainstexpensinghavedelayedtheimplementationof
the new rules for option expensing. Most of the market,
though,hasmovedon.AsofFebruary2004, 276 firmsoutof
the S&P 500 (representing 41 percent of overall market
capitalization)hadshiftedtoaccountingforthefairvalueof
employee options at the time the options were granted.
New Rules on Employee Options
Asnotedearlier,mostfirmshistoricallyhaveusedAPB25,
which defines the exercise value of employee options as
intrinsic value, to account for options. The Financial
AccountingStandardsBoardrecognizedasearlyas 1994 that
thiswasincorrectandproposeda newstandard(FAS 123)
whereoptionswouldbevaluedatthetimeofthegrantand
expensed.However, it allowedfirms to continue to report
earnings under the old rule and required only pro forma
earnings to be computed based on the new standard.
In2002,FASB 148 wasissuedasastopgaprule,layingout
thetwonewtransitionmethodsforfirmsthatwantedtoshift
voluntarilyto value-based accountingforoptions. In 2003,
the final version of the rule (FASB 123R) laid out the
procedure for accounting for options:
- Whenoptions are granted, theyhaveto be valued
using an option pricing model. Firms can pick