Accounting
for Employee Stock Programs Consistently
Stock option accounting changes create inconsistencies.
The IASB and even FASB would like you to believe that the current move toward stock option expensing would bring greater consistency in accounting for employee stock programs. However, looking at a sliding scale of employee stock programs highlights the current accounting consistency and potential problems in making changes.
|
Three forms of employee stock
programs |
||
 |
||
|
Restricted Stock Awards |
Discounted Stock |
FMV |
* A restricted stock award is essentially a discounted stock option discounted 100% or a strike price of $0
Up until now, there has actually been consistency in accounting treatment for FMV options, DSOs, and RSAs. The earnings charge has been fixed equal to the current value of the award on the date of the grant.
For example, for a $10 stock price, on the date of grant:
- RSA charge would be $10 - difference between current stock price and a "strike price" of $0
- 20% DSO charge would be $2- difference between current stock price and a strike price of $8
- FMV option charge would be $0 - difference between current stock price and a strike price of $10
It is still unknown how the change to FMV stock option accounting will fall-fixed or variable charge. However, if a change is made to FMV stock option accounting to expense them at the "future potential upside" value, it would logically follow that DSOs and RSAs both also have the same upside potential. There is a school of thought that, in the future, the charge for this "upside" would then need to be added to the difference between current stock price and strike price for DSOs and RSAs.
By the way, if accounting changes only affect FMV options (all indications seem to be so), the door is wide open for companies to grant DSOs at a slight discount and charge a fixed nominal amount for each option granted.
No matter how you start going down this path, in order to be consistent from an accounting perspective, all forms of employee stock plans become very expensive and lose their attractiveness. Let us hope that FASB is thinking ahead to the inconsistencies before reaching a final mandate on stock option accounting.