FASB Questions Options Formula

Members of the Financial Accounting Standards Board on Wednesday questioned a proposed compromise formula on options expensing.

The proposal by technology companies Cisco Systems Inc., Qualcomm Inc. and Genentech Inc. would change the method of valuing employee stock options. It would cut the value of options by about 70%, compared with the Black-Scholes formula used by many companies that already treat options as a compensation expense.

FASB members, who are finalizing plans to mandate the expensing of options, expressed criticism of the proposed new formula at their meeting Wednesday.

“We have received a lot of information that runs counter to this,” FASB board member Edward Trott said at the meeting. “We have been working with a lot of people for a long time on this.”

Supporters of the new rule say options, whose costs now are only required in a footnote in regulatory filings, should be deducted from profits to make financial statements more transparent. Most companies that treat options as an expense use some form of the Black-Scholes model, but critics say it vastly overstates the value of options.