The Financial Accounting Standards Board
(FASB) succeeds the Accounting Principles Board (APB) on
July 1, 1973, two days after the International Accounting
Standards Committee (IASC) is formed. In 1969 and 1970,
the Accounting Standards Steering Committee had been established
in the United Kingdom and Ireland, replacing the program
of the Institute of Chartered Accountants in England and
Wales for issuing Recommendations on Accounting Principles.
Comment. In the early 1970s, the
phrase “setting accounting standards” replaced
“establishing accounting principles.” The term
“standards setter” came into vogue.
Within the AICPA, the Accounting Standards
Executive Committee (AcSEC), composed entirely of accounting
practitioners, succeeds the APB. It issues Statements of
Position (SOP) on accounting practices in specific industries.
Comment. This was the last preserve
of the AICPA in the area of accounting standards setting,
but the scope of this activity was narrow and Statements
of Position were later subject to FASB approval before they
could take effect. In 2002, FASB announces that, after a
transition period, this work of AcSEC will be phased out.
In Accounting Series Release 150, the SEC
announces that it will look to FASB for leadership in setting
Comment. This was the SEC’s
first formal statement of support for a private-sector body
setting accounting standards (or establishing accounting
principles). Chief Accountant John C. (Sandy) Burton wanted
the SEC to give FASB its full backing.
The Trueblood Study Group, created by the
AICPA in 1971, issues a booklet, Objectives of Financial
Statements, which advocates a “decision usefulness”
approach to the development of accounting standards.
Comment. This was a milestone in
the series of efforts by the accounting profession to establish
a conceptual framework. Unlike the traditional emphasis
on stewardship reporting, the Trueblood Study Group’s
approach was forward-looking: It said that an objective
of financial statements is “to provide information
useful to investors and creditors for predicting, comparing,
and evaluating potential cash flows to them in terms of
amount, timing, and related uncertainty.” The group
could not agree on whether value changes should be reflected
in earnings, but it did provide a framework for thinking
about the issue.
FASB unanimously issues Statement of Financial
Accounting Standards (SFAS) 2, on accounting for research
and development costs, and SFAS 5, on accounting for contingencies,
which signal FASB’s commitment to the primacy of the
“asset-and-liability view” over the traditional
“revenue-and-expense view.” Under the asset-and-liability
view, the definitions of assets and liabilities govern the
recording of revenues and expenses, not the other way around,
as under the matching principle.
Comment. FASB was troubled that
the revenue-and-expense view perpetuated unintelligible
balance sheet accounts that did not fit the definition of
assets or liabilities, such as reserve for self-insurance
and assorted deferred credits. Robert T. Sprouse, one of
the original members of FASB, had written an article titled
“Accounting for What-You-May-Call-Its” in the
October 1966 issue of the Journal of Accountancy to
elucidate this problem implicit in the revenue-and-expense
view. The board concluded that the better approach was to
agree first on whether a transaction had created an asset
or liability and then determine the amount of any revenue
or expense. This asset-and-liability view, which was to
play a central role in FASB’s conceptual framework,
was foreshadowed in these two early standards.
1974, 1976, 1979
The 1970s are a decade of high inflation
in the United States. FASB issues an exposure draft that
would require companies to report price-level-adjusted information
in supplementary statements. But in 1976, under the leadership
of Chief Accountant Burton, the SEC issues Accounting Series
Release 190, which requires approximately 1,300 large, publicly
traded companies to disclose the effects of changing replacement
costs, in a supplementary disclosure. This rebuff embarrasses
FASB, which in 1979 issues SFAS 33. It requires approximately
1,500 large companies to disclose the effects of both current
cost and constant dollar information, in a supplementary
Comment. Here was evidence of the
influence of the SEC’s activist chief accountant.
Burton could argue that his release dealt with disclosure,
not with measurements appearing in the body of the financial
statements. Yet Release 190 forced FASB’s hand. Meanwhile,
in the United Kingdom, the government’s Sandilands
Committee, whose members were drawn from outside the accounting
profession, preferred current costs over the general price-level
information favored by the profession’s Accounting
Standards Steering Committee. Because the government published
general price-level indices, accounting numbers derived
from them (known by FASB as constant dollar information)
were easier to audit than current or replacement costs.
The SEC’s Division of Corporation
Finance and Office of the Chief Accountant begin to issue
Staff Accounting Bulletins (SAB), which represent the interpretations
and practices followed by the Division and the Chief Accountant
in administering the disclosure requirements of the federal
securities laws. More than 100 SABs have been issued since.
Comment. This was a step, probably
inspired by Chief Accountant Burton, to publicize the accounting
views held by the SEC’s staff without having to obtain
the formal endorsement of the commissioners.
By a vote of 6–1, FASB issues SFAS
8, on accounting for foreign currency translation, which
requires that translation gains and losses be reflected
in earnings. The standard induces some major companies to
minimize their accounting exposure through hedging, thus
risking economic exposure. Industry places pressure on FASB
to revise the standard; this is achieved in 1981 by SFAS
52, which excludes certain translation adjustments from
earnings, placing them instead in the shareholders’
equity section of the balance sheet until the related transactions
Comment. This was an example of
accounting gains and losses not necessarily corresponding
with economic gains and losses. To avoid the adverse economic
effects of companies’ hedging against their accounting
gains and losses, as well as bending to the pressure from
companies not to magnify the volatility of their earnings
trends, FASB decided to remove the translation adjustments
from earnings until the eventual completion of the related
transactions. SFAS 52 was approved by a 4–3 vote;
the dissenters disagreed with, among other things, the propriety
of making direct entries in shareholders’ equity.
FASB’s general dissatisfaction with classifying gains
and losses as shareholders’ equity gave rise to “comprehensive
income” in the board’s conceptual framework,
a concept ultimately implemented as a standard in 1997.
By a vote of 5–2, FASB issues SFAS
12, on accounting for marketable securities, which requires
recognition in earnings of unrealized holding gains and
losses on current marketable equity securities, but places
in shareholders’ equity such gains and losses on noncurrent
marketable equity securities.
Comment. This was another area
where accumulated gains and losses were parked in shareholders’
equity instead of being included in earnings, even though
the market prices of the securities were readily available.
It revealed the board’s reluctance to reflect upward
revaluations of noncurrent assets in earnings.
Because of the Arab oil boycott and at a
time of rising crude oil prices, Congress passes the Energy
Policy and Conservation Act of 1975, which instructs the
SEC to require all oil and gas companies to adopt the same
accounting method instead of choosing between “successful
efforts costing” and “full costing” in
their financial statements. In 1977, by a 4–3 vote
FASB issues SFAS 19, which allows only successful efforts
costing. Small oil and gas producers, which had all been
using full costing, protest vigorously and enlist support
in Congress, the Departments of Energy and Justice, and
the Federal Trade Commission. Finally, in 1978’s Accounting
Series Release 253, the SEC says it favors “reserve
recognition accounting,” a version of current value
accounting. The major oil and gas producers object, and
finally the SEC settles for a lengthy footnote disclosure.
Oil and gas companies continue to use either successful
efforts costing or full costing in their financial statements.
Comment. FASB felt rebuffed by
the SEC’s decision to propose a solution other than
the one it had recommended. But SEC Chairman Harold M. Williams
pointed out that this had been a unique case, where the
SEC had been expressly charged by Congress to find a solution.
Apart from Accounting Series Release 190 on replacement
cost accounting (discussed above), this was the only instance
in which the SEC overruled FASB on a substantive accounting
It is a matter of interest that the SEC’s
decision was formulated by the commissioners themselves,
and not by the SEC’s accounting staff. The commissioners
had become actively engaged in the accounting issue—something
that rarely occurs—because of the intense political
lobbying by the powerful oil and gas industry, which secured
the eager support of members of Congress from oil-producing
states. To nonaccountants, historical cost accounting is
not a solution that responds to the information needs of
investors and creditors. The Sandilands Committee, mentioned
above, had earlier arrived at a similar result. Historical
cost accounting is a construct understood by accountants
and a puzzle to nonaccountants, who typically believe that
current market value is more relevant for investors and
Concerned about their ability to obtain
bank financing, small and medium-sized oil and gas exploration
companies had resisted successful efforts costing, because
it would make their earnings trend more volatile and, in
the near term, vastly lower their earnings. The Energy Department
did not like successful efforts costing because the exploration
companies’ more volatile earnings would be a disincentive
to explore in untried fields. The Justice Department, together
with the Federal Trade Commission, feared that successful
efforts costing by small and medium-sized exploration companies
would lead to bleak earnings pictures that might drive them
into mergers with the big companies, thus reducing the number
of competitors in the industry. These were all political
reasons, not accounting reasons, and after hearing all of
the arguments, the SEC commissioners favored current value
accounting instead of either version of historical cost
After the SEC proposed requiring oil and
gas companies to report the gains from the increase in market
value of their proved reserves in their income statements—gains,
because the OPEC cartel was regularly raising the price
of crude—the American public, which was already concerned
about the rising price and scarcity of fuel, had risen in
wrath against the oil industry. The last thing that the
major oil and gas companies (Exxon, Mobil, Gulf, Shell)
wanted to report was even higher accounting earnings, because
of their concern over the appearance of gouging the public.
In the end, the SEC withdrew the proposed
requirement to record current values in the financial statements
of oil and gas companies and instead instructed FASB to
issue a standard (which became SFAS 69, approved 4–3
in 1982) that would specify “a comprehensive package
of disclosures for those engaged in oil and gas producing
activities,” reflecting current values. The oil and
gas industry had weathered the storm; as before, some companies
were using successful efforts costing, while others were
using full costing. Historical costs continued to be used
in the body of the companies’ financial statements.
After considerable pressure from the leasing
industry, FASB issues SFAS 13, approved 5–1, establishing
the capitalization of long-term financing leases on lessees’
books. The standard is amended numerous times as FASB seeks
to close loopholes, yet SFAS 13 nonetheless proves to be
ineffective in requiring that most long-term leases be capitalized.
Comment. Because of the resourcefulness
of the leasing industry in finding loopholes in SFAS 13,
this became the most frequently amended accounting standard.
It demonstrated that a standards setter should not establish
explicit, arbitrary cutoff percentages, because companies
seeking to circumvent the intent of the standard will inevitably
find ways to do so. It may be the best example of a rule-based
standard that fails to specify a guiding principle.
Two Congressional reports recommend that
the SEC no longer rely on FASB for accounting standards
but instead issue the standards itself.
Comment. The reports were issued
by the staff of the Senate’s Metcalf Committee and
by the House’s Moss Committee. The issue of public-sector
versus private-sector standards setting was raised in these
reports, but, in the end, no Congressional action was taken
on these recommendations.
By a 5–2 vote, FASB issues SFAS 15,
on accounting by debtors and creditors for troubled debt
restructurings, which, in effect, allows financial institutions
that agree with debtors to modify the terms of their long-term
loan agreements (lengthening the term and reducing the interest
rate) to avoid recording a loss on the restructuring. The
banking industry argued that a requirement to recognize
a loss in such circumstances would lead to reluctance by
banks to renegotiate such loans, thus leading to a higher
rate of business failure.
Comment. In 1973, the City of New
York was said to be bankrupt, and, with great difficulty,
the banks that held the city’s debt instruments restructured
the debt by modifying its terms. The principal payments
were postponed, and the interest rate on the debt was lowered.
The banks proposed not to reduce the balance on their books
of the loan receivable from the city and therefore not to
recognize any immediate accounting loss. FASB began to study
the question, and the possibility of recognizing a loss
in the event of such restructurings was put to a public
hearing. At the hearing, Citicorp Chairman Walter B. Wriston
said that if the banks had known that they might be required
to recognize an immediate accounting loss from restructuring
the city’s debt, “the restructuring just might
not have happened.” Furthermore, the prospect of a
required recognition of a loss in such cases led Wriston
to doubt that such restructurings would be possible in the
future. His bombshell testimony put considerable pressure
on FASB. In the end, the board said in SFAS 15 that if,
after a restructuring, the total cash flows to be received
under the new terms were no lower than the balance in the
receivable account, no writedown or loss recognition would
be required. The standard was heavily criticized because
it ignored the economic reality of the transaction altogether.
Application of SFAS 15 also prolonged and
deepened the financial crisis faced by banks and savings
and loan institutions in the 1980s. Many banks and thrift
institutions effectively became insolvent because of many
bad loans, especially at a time of high interest rates.
Federal regulators allowed them not to record writedowns
or recognize losses after they had restructured loans to
accommodate the debtors. Hence, many of these financial
institutions could issue balance sheets projecting an apparent
solvency, when many should have been closed. SFAS 15 was
used by regulators to justify this policy. As a result,
the standard was said by many to be the worst ever issued
Responding to criticisms from within the
accounting profession, the Financial Accounting Foundation’s
(FAF) trustees strengthen FASB’s due-process procedures
and impose a 4–3 majority, instead of a supermajority
of 5–2, to approve its standards. It was believed
that the required 5–2 majority was holding back FASB
approval of several standards (notably SFASs 19 and 34).
The board also opens its meetings to public observation.
FASB issues its Concepts Statements on objectives,
qualitative characteristics, elements (definitions), and
recognition and measurement, constituting its conceptual
framework for business enterprises. As the issues become
more specific, eventually dealing with the sensitive and
practical matters of recognition and measurement, the board
can agree only to be general and not prescriptive. This
reflects the fact that each of the board members has an
individual conceptual framework, which becomes evident when
the core issues of recognition and measurement are taken
up. The result of the board’s conceptual framework
discourages those who had hoped that it would point the
board toward a resolution of its most difficult standards
Comment. Although there was no
suggestion in the Wheat Study Group’s report that
FASB should develop a conceptual framework, the board discovered
that several of the early standards—for example, on
research and development costs and contingencies—required
it to define assets and liabilities more clearly. Furthermore,
the Trueblood Study Group’s booklet, Objectives
of Financial Statements, was available as the first
layer of such a framework.
The conceptual framework became a massive
project. Between 1974 and 1985, the board issued 30 discussion
memoranda, research reports, exposure drafts, and other
publications, totaling over 3,000 pages. The first Concepts
Statement, Objectives of Financial Reporting by Business
Enterprises, was published in 1978. The second, Qualitative
Characteristics of Accounting Information, published
in 1980, was widely imitated in other countries.
The series of Concepts Statements proved
useful to the board when facing novel accounting questions.
The board wanted to be guided by principle wherever possible,
and the framework contributed toward that end. But it became
evident that a considerable amount of reasoning was needed
to connect the framework with the specific accounting problems
to be solved.
FASB was a pioneer in that it was the first
accounting standards setter in the world to complete work
on a full-fledged conceptual framework. Since then, the
standards setters in Australia, Canada, the United Kingdom,
and New Zealand, as well as the International Accounting
Standards Board, have borrowed ideas from FASB’s framework.
In later years, FASB has revisited the framework, for example
by issuing a Concepts Statement in 2000 on cash flow information
and present values in accounting measurements. In October
2004, FASB and the International Accounting Standards Board
agreed to develop a common conceptual framework, building
on the two bodies’ respective frameworks.
By a 4–3 vote, FASB issues SFAS 34,
requiring that companies capitalize interest cost for certain
self-constructed assets. The standard is issued to correct
an abuse. In 1974, at a time of rising inflation and interest
rates, a number of companies had been capitalizing, rather
than expensing, their interest cost, so as to report higher
earnings. At this time, the SEC immediately placed a moratorium
on this practice until FASB could decide whether it was
a proper accounting practice.
Comment. The capitalization of
the cost of interest had not been practiced in the United
States other than in the public utility industry, where
the rate of return on investment was used by regulators
to set prices. In that industry, the interest cost incurred
to expand plant capacity was intentionally charged to future
generations of users through capitalization and then amortization
when the new capacity went into service. To expense the
cost of interest would, in effect, charge current users
for the interest cost to build future capacity.
The matter had not previously been the subject
of an accounting standard anywhere in the world, and there
was no prohibition against capitalizing the cost of interest.
Five years after the SEC, fearing that these companies’
financial statements might be misleading to investors and
creditors, placed a moratorium on the practice, FASB issued
its standard on the subject. In SFAS 34, it narrowly defined
the classes of assets on which interest could be capitalized.
1985, 1987, 1990, 1996
On four occasions, as the flexibility to
produce favorable earnings grows in importance to CEOs,
industry places pressure on FASB to be more responsive to
its objections. Attempts are made to expand the number of
industry representatives on the FASB board and to exercise
more control over its agenda. In 1990, industry persuades
the FAE trustees to raise the majority required to approve
standards from 4–3 to 5–2, hoping to slow the
pace of standards setting. In 1996, SEC Chairman Arthur
Levitt, reacting to further pressure from the Financial
Executives Institute (FEI), forces the FAF to add four public
interest members to its board of trustees.
Comment. This series of interventions
from industry epitomized the higher stakes that companies
placed on the flexibility to choose their preferred accounting
methods. The 1980s was a period of intense merger and acquisition
activity, and CEOs as well as CFOs began to pay close attention
to FASB’s proposals to disallow certain accounting
methods, impose additional disclosures, and specify in greater
detail how its standards were to be interpreted. As companies
increasingly based annual bonuses on accounting earnings,
and increasingly turned to employee stock options, executives
became more sensitive to how earnings were measured. In
the 1990s, it became common for financial analysts to issue
earnings forecasts, and company executives knew that their
share price would suffer if they reported earnings-per-share
below the forecast. All of these pressures were in turn
transmitted to FASB, and industry sought to have more influence
over the actions of the standards setter. Of course, the
SEC would continue to enforce FASB’s standards strictly,
imposing heavy penalties for noncompliance.
At the same time, top corporate executives
transmitted these pressures to their accounting departments
and from there to their external auditors, which is one
explanation of the willingness of auditors to accede to
the marginal and even illicit accounting practices that
have come to be known as “managed earnings.”
While industry enjoyed a few successes in
influencing the composition and operating procedures of
FASB, the SEC intervened to protect the independence of
the board, especially in 1987 and 1996, when the Business
Roundtable and FEI, respectively, sought to exert more industry
control over the operation and governance of FASB.
By a 4–3 vote, FASB issues SFAS 87,
on employers’ accounting for pension plans, after
11 years of study on the large and complicated subject of
pension accounting, comprising three discussion memoranda,
six exposure drafts, four public hearings, and six standards.
While it represents an improvement in pension accounting
practice, it significantly understates the full accounting
impact of company pension plans by a variety of smoothing
rules and an extended adoption period. Also, the standard
appears at a time of strong stock and bond markets. Industry
had successfully lobbied FASB to dampen the effect of volatility
on companies’ earnings as a result of market value
Comment. This was a sensitive subject
that had been followed closely by the Business Roundtable
since the 1970s. It was especially critical to companies
in older industries, such as automobiles and steel. Once
again, companies pressed FASB not to heighten the volatility
By a 6–1 vote, FASB issues SFAS 94,
which requires parent companies to consolidate subsidiaries
with nonhomogeneous operations, such as the finance subsidiaries
of manufacturing parents. FASB also endorses the notion
of control for determining when investee companies should
be consolidated, but the board puts off implementation.
It makes several attempts to implement it in the 1990s,
but cannot agree on an adequate and workable approach for
Comment. Companies were concerned
that the consolidation of industrial parent companies with
their finance subsidiaries (e.g., General Motors, Ford,
and General Electric) would confuse readers about the debt-equity
ratio of the industrial parent. Finance companies are much
more heavily leveraged than industrial companies, and industry
preferred that their financial statements not be merged.
General Electric has responded by publishing three sets
of financial statements in its annual report to shareholders:
the consolidated statements, the parent company statements,
and the finance subsidiary’s statements.
By a 4–3 vote, FASB issues SFAS 95,
which requires companies to publish a cash flow statement,
replacing the Statement of Changes in Financial Position
(funds statement). The standard implements a recommendation
in Concepts Statement 5, on recognition and measurement.
FASB allows companies to use either the direct or the indirect
method of presentation.
Comment. The cash flow statement
replaced the Statement of Changes in Financial Position,
a funds flow statement, reflecting a worldwide trend. Standards
requiring cash flow statements were issued in Australia
in 1983 and in Canada in 1985; hence, on this subject, FASB
was not in the vanguard.
By a 5–2 vote, FASB issues SFAS 96,
which establishes an asset-and-liability approach for determining
deferred tax liabilities, but prohibits the recognition
of tax benefits expected to be realized in future years.
Shortly after its issuance, FASB concludes that the standard
is unworkable and too complex, and it postpones the effective
date of SFAS 96 three times. Finally, in 1992, FASB unanimously
issues SFAS 109, which allows deferred tax assets to be
recognized in many situations.
Comment. This was one of the best
examples of how the asset-and-liability view led to a more
FASB unanimously issues SFAS 106, on accounting
for postretirement health-care costs. This standard was
strongly opposed by industry because companies did not want
to show a liability for the contractual commitments they
had given over the years to cover retired-employee health-care.
General Motors recognizes a first-time expense and liability
of $20.8 billion, which constituted 77% percent of its shareholders’
equity at the end of the previous year. The shareholders’
equity balances of Chrysler, Ford Motor, AT&T, and IBM
are also hit hard by the newly recognized liability. Many
regard SFAS 106 as the best standard FASB ever issued, as
it forces companies to face the true cost of their future
obligations for health-care benefits granted to employees.
It gives rise to the maxim “You manage what you measure.”
Comment. Industry intensely disliked
this standard and fought against it; afterwards, companies
conceded its constructive effect on their decision making.
It is an excellent example of how a standard can have a
considerable impact on corporate behavior. SFAS 106 has
been one of the board’s successes.
By a 5–2 vote, FASB issues SFAS 115,
on accounting for investments in certain equity and debt
securities. Although the SEC argues strongly for fair value
accounting, with all gains and losses recognized in earnings,
the banking industry vociferously opposes this solution
because of the resulting earnings volatility. A political
compromise is thus forced on the board to recognize “trading
securities” and “available for sale securities.”
Both would be on the balance sheet at fair value, but the
unrealized gains and losses on “available for sale
securities” would be parked in shareholders’
equity, and not be taken to earnings.
Comment. This standard was a revision
of SFAS 12, which distinguished between current and noncurrent
investments in securities. This reconsideration began in
earnest when SEC Chairman Richard C. Breeden made it known
in 1990 that he favored the use of current value accounting
for marketable securities held by banks and thrift institutions.
The SEC was an unusual source for the advocacy of current
value, or fair value, accounting in company financial statements,
as it had strongly asserted the propriety of having financial
statements prepared on the basis of historical cost accounting
since its founding in 1934 (the lone exception being reserve
recognition accounting for oil and gas producers in 1978).
This marked the beginning of the SEC’s more yielding
position toward fair value accounting in the 1990s, especially
for financial instruments.
As the board moved in the direction of a
current-value standard, with the gains and losses taken
into the income statement, the banking industry, including
Secretary of the Treasury Nicholas Brady and Federal Reserve
Board Chairman Alan Greenspan, protested vigorously. Congress
also became involved. Their concern was not only over the
volatility of earnings that the standard would create, but
also over its possible effect on credit availability and
the perceived financial stability of the country’s
banking sector. The board’s political solution allowed
gains and losses accruing on securities most likely to have
large gains and losses (i.e., those designated as available
for sale securities) to be buried in shareholders’
equity, while the more modest gains and losses on trading
securities (i.e., ones likely to be disposed of very soon)
would be shown in the income statement.
In another application of fair value accounting,
by a 5–2 vote FASB issues SFAS 121; it requires companies
to recognize the impaired values of assets but, at the same
time, stops them from overaccruing provisions (i.e., “big
bath” charges) that would artificially ensure larger
reported profits in the future. SFAS 121 (which is superseded
in 2001 by SFAS 144) provides a series of decision rules
for such writedowns, including the fair value of the impaired
assets or, in the absence of a determinable fair value,
the present value of future expected cash flows.
Comment. SFAS 121 addressed a problem
that had attracted considerable attention in the 1980s,
when some companies were thought to have exaggerated the
amounts of their impairment writedowns in order to project
a rosy future. The market ignored massive writedowns in
such circumstances, because it was interested only in future
prospects, and the companies took full advantage of this
tactic. The purpose of the standard, which represented another
step in the direction of fair value accounting, was to impose
some discipline on companies recording impairment writedowns.
As with many of FASB’s standards, there were no precedents
in other countries on which to build.
By a 5–2 vote, FASB issues SFAS 123,
on accounting for employee stock options. This standard
also involves an estimate of fair value, through the use
of option-pricing models. But an unprecedented political
lobbying campaign by small, high-technology companies secures
the active support of Congress and prevents FASB from requiring
the recognition of the stock option expense in companies’
income statements. Instead, the amount of the expense for
options recently granted is to be disclosed only in a footnote
to the financial statements.
Comment. The run-up to SFAS 123
was one of the best-known examples of political pressure
on FASB, including strong influence exerted by Congress.
Had FASB persisted in issuing a standard requiring the expensing
of options, Congress might have passed legislation putting
FASB, in effect, out of business. By the early 1990s, the
awarding of employee stock options to corporate executives
and, often in the high-tech industry, to all employees,
had burgeoned. The last previous standard on the subject,
issued by the APB in 1972, had antedated the development
of option-pricing models and said simply that no compensation
expense was to be recorded unless the market price of the
shares under the option was greater than the exercise price.
For income tax reasons, the exercise price was always set
to equal the market price; hence, no compensation expense
would be recorded. Most observers considered that such stock
option compensation was not devoid of cost.