FASB Issues Proposal on Stock Option and ESPP Expensing

By Marian A. Tse and Scott A. Webster

It appears that stock option expensing is on its way. Not only will this affect stock option and other equity award practices, but most employee stock purchase plans, or ESPPs, that contain a discount or a so-called look-back feature (e.g., a purchase price equal to 85% of the lower of the starting or ending stock price) will also be affected. It is important that companies that grant stock options or other equity awards, and companies that have ESPPs, consider the implications of the new accounting rules before they become effective.

The Financial Accounting Standards Board ("FASB") recently issued a proposed statement on share-based payments that addresses the issue of expensing stock options and other equity awards to a company’s employees and directors. The proposed statement is expected to be finalized during the fourth quarter of this year. The proposed statement is an amendment to FASB Statement No. 123 ("FAS 123") and