A Troubling Requirement

Abstract

Since the Enron collapse in mid-2002, the Financial Accounting Standards Board (FASB) has been pressed to require that companies include the hypothetical expense of their employee stock options in their financial statements. Many lawmakers and commentators on financial matters have argued that employee stock options are a form of compensation, and the failure to show the cost of those instruments results in misleading financial reports. FASB has no idea how companies might be able to establish the fair value of employee stock options. The responsible course would be for the Board to wait until it or some other entity has created a model for pricing employee stock options that is generally recognized as faithfully representing what it purports to represent. Until then, FASB should stick to its current requirement that disclosure occur in the footnotes to the financial statements rather than in the computation of net income.

Keywords: Enron, Financial Accouting Standards Board, FASB, stock options, disclosure, Enron, Generally Accepted Accounting Practices, GAAP, fraud, financial markets, accounting practices

JEL Classification: G30, G32, G38, M41, J33