FASB Proposes Option Accounting Rules

The Financial Accounting Standards Board (FASB) has, as expected, issued proposed rules stating that if a company reprices its options, they are subject to variable accounting rules, meaning that companies will have to record as an expense the difference between the new lower grant price and any subsequent increase in the price of the underlying shares for each year the share price exceeds the option grant price. Companies could, however, cancel the old options and issue new options at a lower price if they wait at least six months after the cancellation. If they do this, the new options would not trigger a compensation expense.

The board also exempted stock purchase plans with "lookback" features from any requirement to record the bargain element as a compensation expense. Lookback features allow employees to purchase stock at the lower of a current price (usually with a 15% discount) or the time when they started to put pay aside to provide funds to buy the shares, often six months to one year before the actual final date to commit to the purchase.