More US companies to expense stock options

Two more US companies are set to follow Coca-Cola’s example of expensing their stock option plans. The Atlanta-based drinks company last week said it plans to expense the cost of all stock options the company grants beginning in the fourth quarter.

New York-based fund manager Neuberger Berman and Cincinnati-based power company Cinergy, will expense all granted stock options from next year. As with Coca-Cola, the companies said they plan to follow the ‘fair value’ measurement method when expensing the options. This measures the cost of compensation by applying an option pricing model – usually Black-Scholes – at the date the options are granted to employees.

At present, companies do not have to expense share options, but this is likely to change due to current market concerns about the accuracy of corporate results - especially in the US.

“These changes reflect our ongoing commitment to ensuring that all compensation costs are clearly recorded in our financial statements,” said James Rogers, Cinergy’s chief executive officer.

Jeffrey Lane, chief executive officer of Neuberger Berman, commented: “As an asset manager, we depend on the transparency of financial statements in making investment decisions for our clients. The same transparency should extend to our own accounting methods.”

The US Financial Accounting Standards Board (FASB), the official US body for establishing standards of financial accounting, encourages fair value as opposed to ‘intrinsic value’ reporting. The intrinsic method measures the difference between the market price of the underlying stock and the exercise price of the option. It is also measured from the grant date of the option, but generally gives a compensation cost of zero because most companies set the exercise price of the option equal to the market price of the share at the grant date.