Stock Options: The Accounting Issue and Its Consequences (CRS Report for Congress)
| Release Date |
Nov. 15, 2005 |
| Report Number |
RS21392 |
| Report Type |
Report |
| Authors |
Bob Lyke, Domestic Social Policy Division; and Gary Shorter, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
The Financial Accounting Standards Board (FASB) has issued a long-anticipatedrule that stock options must be recognized as an expense on corporation incomestatements. The previous accounting rule permitted but did not require recognition;corporations that elected to omit the cost of options, as most did, have been able toreport higher earnings. Supporters of the old rule argue it encouraged companies toissue options, helping to ensure that executives served the shareholders' interests.Options can be especially useful to cash-constrained start-up companies that cannot paycompetitive salaries. Supporters also maintain that options cannot be valued accuratelyenough to be included on the income statement and that investors otherwise havesufficient information to make informed judgments about company value. Critics of theold rule argue that it encouraged excessive use of options and created incentives forexecutives to manipulate financial data in order to drive up stock prices. They note thatexercised options are deducted in determining corporate income tax liability. FASBprovided that the effective date for most companies would be the first fiscal quarterbeginning after June 15, 2005, but the U.S. Securities and Exchange Commission (SEC)has given many companies a six-month deferral. H.R. 913 (Representative Dreier)would require enhanced disclosure of companies' stock options and a three-year studyof its effects, during which time new accounting standards on options would not berecognized.
