FASB Moves Closer to Options-Expensing Rule

U.S. accounting rule makers, moving closer to a decision that would force companies to deduct billions of dollars in stock options from earnings, voted unanimously Wednesday to overhaul current options rules.

The Financial Accounting Standards Board, the private-sector panel that sets U.S. accounting rules, voted 7 to 0 to add options to its agenda. The board plans to develop new options accounting rules within a year.

In the strongest signal yet that rule makers intend to force companies to formally deduct stock option costs from profits, FASB said its project would focus on formulating rules that are similar to global accounting rules. International accounting rule makers have already proposed making stock-options expensing mandatory.

“It’s an attempt to more honestly assess a company’s financial condition,” said Charles Mulford, an accounting professor at the Georgia Institute of Technology.

The push to alter options accounting follows scandals at Enron Corp. and other companies in which inflated earnings helped executives reap millions in option profits. Although more than 150 U.S. companies, including Coca-Cola Co. and Wal-Mart Stores Inc., now treat options as a salary cost, technology firms -- the heaviest users of options-based pay -- oppose the idea.

Tech firms say an options rule change would make it difficult for investors to understand how a company’s basic business is performing, by adding a volatile new element to how firms calculate net profit.

“What we are going to do is confuse the market even more if we move in this direction,” said Craig Barrett, chief executive of Intel Corp. Under a regime that requires all stock options to be accounted for as compensation, companies would be deducting billions from profit for options that were never exercised because stock prices have fallen so much, Barrett said.

Intel’s 2002 profit would have been reduced by $1.17 billion, or 38%, if the company had accounted for options as an expense, according to the company’s own estimates.

Separately, FASB agreed to push for greater disclosure from companies in their pension fund accounting. Current pension accounting rules allow firms to include income from estimated pension fund gains even if those funds are actually losing money.

The board said it will seek to publish a draft rule within six months that would require companies to make greater quarterly pension fund disclosures, including their assets and obligations and the fund’s actual, rather than estimated, performance.

FASB Chairman Robert Herz said the current pension accounting standard, written in 1985, is “a Rube Goldberg device and one of the prime examples of bad accounting.”