Number: RS21392
Title: Stock Options: The Accounting Issue and Its Consequences
Authors: Bob Lyke, Domestic Social Policy Division; and Gary Shorter, Government and Finance Division 
Abstract: The Financial Accounting Standards Board (FASB) has issued a long-anticipated rule that stock options must be recognized as an expense on corporation income statements. The previous accounting rule permitted but did not require recognition; corporations that elected to omit the cost of options, as most did, have been able to report higher earnings. Supporters of the old rule argue it encouraged companies to issue options, helping to ensure that executives served the shareholders' interests. Options can be especially useful to cash-constrained start-up companies that cannot pay competitive salaries. Supporters also maintain that options cannot be valued accurately enough to be included on the income statement and that investors otherwise have sufficient information to make informed judgments about company value. Critics of the old rule argue that it encouraged excessive use of options and created incentives for executives to manipulate financial data in order to drive up stock prices. They note that exercised options are deducted in determining corporate income tax liability. FASB provided that the effective date for most companies would be the first fiscal quarter beginning after June 15, 2005, but the U.S. Securities and Exchange Commission (SEC) has given many companies a six-month deferral. H.R. 913 (Representative Dreier) would require enhanced disclosure of companies' stock options and a three-year study of its effects, during which time new accounting standards on options would not be recognized.
Pages: 6
Date: November 15, 2005