“The nation’s accounting rulemaker decided Thursday that companies will have to begin deducting the value of stock options from their profits next year, removing a cheap way to compensate workers that had been abused by executives and clouded earnings,” Michael P. Regan reports for The Associated Press. “The move has been cheered by shareholder advocates but scorned by many companies who rely heavily on options to beef up compensation packages.”
“The Financial Accounting Standards Board’s long-awaited decision calls for public companies to start expensing options beginning with their first annual reporting period after June 15, 2005,” Regan reports. “Many employees of companies like Microsoft Corp. and America Online famously became millionaires in the 1990s thanks to stock options.”
Under current accounting standards, a company’s cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the income it reports to investors. The new rules will instead force companies to subtract the option expense from earnings, which could dramatically knock down profits at some companies,” Regan reports. “For instance, Apple Computer Inc. said in its latest annual report that its fiscal 2004 earnings would be cut from 71 cents per share to 44 cents had it expensed its options at their fair-market value.”
“But the FASB’s actions are far from being set in stone considering that Congress has the power to mute its action. A bill passed through the U.S. House of Representatives last summer that would require companies to only expense the options granted to their five top executives, though that piece of legislation is currently stalled in the Senate,” Regan reports.
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