FASB Issues New Rules Affecting Stock Options
NCEO founder and senior staff member
The Financial Accounting Standards Board (FASB) announced this month (March 1997) that it would change accounting standards for the way companies calculate per-share net earnings. The new rules are effective December 15, 1997. The rules will have a particular impact on companies with stock options. Under current rules, companies report "primary" earnings per share based on the fully diluted outstanding shares. In other words, options, warrants, and other convertible securities are counted as outstanding shares. Under the new procedures, companies will instead report "basic" earnings per share, excluding these securities. By reducing the number of shares in the denominator of the earnings per share calculation, the resulting ratio will be larger, all other things being equal.
The FASB rules also change fully diluted earnings reporting procedures. Under current rules, these include the fully diluted effects of options, warrants, and other convertible securities. To determine the value of stock options, companies currently calculate the value of options as of their price on the last day of the quarter being reported. Under the new rules, the average price during the quarter will be used. This would mean a higher price/earnings ratio in a rising market.