FASB Releases Interpretation on Stock Compensation,

Revises Present Value Accounting

The Financial Accounting Standards Board recently released a proposed interpretation that seeks to resolve practice issues raised when accounting for stock options. The comment deadline is June 30. The proposal addresses application issues and differing practices that have developed since the 1972 release of APB Opinion 25, Accounting for Stock Issued to Employees. The board's interpretation seeks to clarify questions that arose after the 1995 release of FASB Statement 123, Accounting for Stock-Based Compensation, which permitted the continued application of APB 25.

The current proposal states the following:

* Once an option is repriced, that option must be accounted for as a variable plan from the time it is repriced to the time it is exercised.

* Employees would be defined as they are under common law for purposes of applying APB 25.

* APB 25 does not apply to outside directors because, by definition, an outside director cannot be an employee.

* A subsidiary may account for parent company stock issued to its employees under APB 25 in their separately issued financial statements, provided the subsidiary is part of the parent's consolidated financial statements.

In addition, since the release of APB 25, the terms of many section 423 plans have changed. Many plans now provide that employees can purchase an employer's stock at the lesser of 85 percent of the stock price at the date of grant or 85 percent of the price at the date of exercise. This provision is referred to as a look-back option. The board decided that plans with a look-back option do not, in and of themselves, create a compensatory plan.

If finalized, the interpretation is effective upon issuance, expected in September 1999, but generally covers events that occured after December 15, 1998.

To receive a copy the proposal, Accounting for Certain Transactions Involving Stock Compensation, An Interpretation of APB Opinion No. 25, call the FASB order department at (800) 748-0659 or visit www.fasb.org and click on Exposure Drafts in the Publications section. *

The Financial Accounting Standards Board recently proposed a concepts statement outlining a framework for using future cash flows as the basis for an accounting measurement. The proposal reflects redeliberation and consideration of comment letters received following the board's June 1997 exposure draft on value accounting.

The concept statement provides general principles for present value accounting, especially when the amount of future cash flows, their timing, or both are uncertain. It also presents a common understanding of present value's objectives in accounting measurements. The comment deadline is August 1.

"Most of the changes made were in response to constituents' requests for clarification or suggestions about how the proposed concepts statement could be improved," Senior Project Manager Wayne Upton said.

The 1997 proposal described two objectives for present value measurements of assets--fair value and entity-specific measurement. Entity-specific measurement attempts to capture the value of an asset or liability in the context of a particular entity. This measurement differs from fair value by substituting the entity's assumptions for those that marketplace participants would make. After redeliberation, the board decided to remove the notion of entity-specific measurement.

The 1997 proposal also presented three objectives for present value of liabilities. The current proposal eliminates entity-specific measurement of liabilities and clarifies that the most relevant measure of a liability should always reflect the credit standing of the entity obligated to pay.