FASB Considering New Rules in Option Repricing

The Financial Accounting Standards Board (FASB) has tentatively decided to require companies to account for the value of stock option repricing on their income statements. In FASB 123, the accounting board told companies that they did not have to report the present value of options on their income statements, provided they put that information in a footnote. Instead, companies could follow the older APB 25 for their income statement presentation. That procedure said that fixed option plans (options that fix a grant price and do not make the exercise of the option subject to performance conditions other than normal vesting schedules) do not have to show up on the income statement, but that variable option plans (plans where the option price or the ability to exercise varies with the achievement of specified objectives) do have show up. FASB argues that repricing makes an option plan a variable plan. Companies would have to report the cost of the repricing (the old grant price minus the new grant price times the number of outstanding options to which the repricing applies) on their income statements.

Predictably, the proposal has generated a lot of response from companies and consultants who do not want the cost to show up, a cost that could be tens or hundreds of millions in some cases. The recent fall in stock prices could trigger a wave of repricings, according to some consultants. The proposal will now be available for comment. If adopted, it will not be effective, in all likelihood, until at least the year 2000.