Expensing stock options: the rule is final; Or is it? Most companies following new accounting rules since June 15 have begun to expense stock options. But others--including private and smaller public companies--insist the struggle to reject or modify the accounting is not over.

• Author: Cheney, Glenn
• Position: Stock options

It's happening. After a struggle of more than 10 years, Financial Accounting Standard No. 123(R) is going into effect. Since June 15, certain public companies have been accounting for share-based payment transactions--including employee stock option compensation--as an expense, often against their will and better judgment.

The arguments are widely known. Investors, analysts and the Financial Accounting Standards Board (FASB) tend to agree that stock option compensation is worth something and therefore should have an effect on a company's bottom line. On the other hand, many companies argue that the value of stock compensation cannot be computed with reasonable accuracy and therefore should be relegated to the footnotes of financial statements.

Right or wrong, accurate or fudged, fair or not, 123(R) must be implemented now by large public companies whose fiscal years began after June 15, and soon by private companies and smaller public companies whose fiscal years begin after December 15. All have a choice of prospective or retrospective recognition, and any company can start as soon as it wants.

Corporations have responded in a number of ways, and some insist that the struggle isn't over. Even as they begin to comply with the new rules, they are hoping, and even pressing, for a reprieve. Some have, in a sense, given in. Dell Inc., Aetna Inc., Pfizer Inc., McDonald's Corp., Time Warner Inc., ExxonMobil Corp. and Microsoft Corp. are among the companies that have either stopped granting stock options to employees or have cut back to offer them only to top executives.

Many companies, however, would rather suffer the hit to profits than lose an invaluable employee incentive. And, in some cases, the stakes are high. Intel Corp. plans to apply prospective recognition beginning in fiscal 2006. It doesn't expect the first report to look pretty. The company's 10-Q for the period ending April 2 reported a $333 million drop in pro forma net income, which went from $2.178 billion to $1.845 billion.

Qualcomm Inc. expects to get hit hard, too. Bill Keitel, executive vice president and CFO, says that according to the theoretical expense reported in the company's financial footnotes, earnings per share (EPS) in future statements could drop by 13 percent. Yet, dropping options isn't an option, since 99 percent of Qualcomm's employees have received or are receiving stock options as compensation, and not without reason.

"We really think the shareholder benefits greatly," Keitel says. "With an equity incentive program, we attract better people, and our retention rate is the envy of many. It affects how employees think, day in and day out. The fact that they have these stock options affects how they work," he says...