The formal accounting name FAS R is the Financial Accounting Standards Board statement on share-based compensation and more specifically addresses the expensing of stock options.

The FAS R rules as it relates to options is often misunderstood, but if attention is focused on the key areas, accounting for stock options becomes much more straightforward.

Understanding How Options are Evaluated It is very important that before being able to accurately and efficiently account for stock options that the responsible parties clearly understand how these vehicles are evaluated. The company board members or whomever is responsible for the granting of stock options should have a deep understanding of the key option evaluating factors like time to maturity, volatility of the underlying stock, vesting period, forfeiture rates and blackout periods.

Determine the Option Valuation The FAS R only requires that the option valuation is accounted for at grant date versus when the performance or service-based criteria have been met. This means that regardless if the option grant was tied to performance or service, the options are valued and expensed based on the grant date. Decide if Accelerated Option Vesting is a Possibility See if any of the stock options you have granted that are far out-of-the-money can have their vesting accelerated to prevent having to incur a future compensation expense associated with these options.

Before FAS R, this was not the case. Account for the Tax Impacts of Option Compensation One of the biggest changes with FAS R is where windfall tax benefits will be recorded.

With FAS R, a windfall tax benefit is created if the deduction for tax purposes exceeds the option compensation cost recognized in the income statement. Stock Option Record Keeping Stock options under FAS R requires that the companies maintain income tax data by award, option holder, country, and vesting to allow for the appropriate accounting entries can be recorded.

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