Apple will have to start expensing options thanks to a new ruling by the Financial Accounting Standards Board (FASB).

From next year the company will be required to deduct the value of stock options from profits. The changes won't come into play until after June 15 2005 however, meaning that the effects of the new accounting procedure won't be seen until Apple issues its annual financial report for fiscal 2006, which starts in October 2005.

The new rules will force companies to subtract the option expense from earnings. This could dramatically knock down profits at some companies, including Apple.

Apple's diluted earnings per share for the 2004 fiscal year would have been 27 cents less, if it followed the procedure now being enforced when expensing the cost of employee stock options.

When it reported its financial results in October, Apple said its 2004 earnings were 71 cents a share. In the company's SEC Form 10-K, Annual Report, issued on at the beginning of December, it admitted earnings per share would have been 44 cents if it used the different method to figure the cost for employee stock options.

Compensation complication

The ruling will change the way companies such as Apple compensate employees and executives, and the way it accounts for that compensation.

Stock options are perks given to employees that allow them to buy shares of their company's stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference, explains Associated Press (AP).

FASB chairman Robert Herz told AP: "The new rules provide investors and other users of financial statements with more complete and unbiased financial information."

Under current accounting standards, a company's cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the income it reports to investors, according to AP.


A group has already formed that is opposed to the new rules. The International Employee Stock Options Coalition chairman Rick White said the methods of valuing stock options are "so confusing and open to interpretation that they are not even auditable."

Some companies argue that the new rules will negatively affect worker moral and loyalty.

Computing Technology Industry Association director of public affairs Bruce Hahn said: "We need incentives that will help create jobs and foster the development of new products and services."

Watson Wyatt Worldwide human resources consultant Ira Kay said: "Basically, there's a bit of a chicken and egg here in terms of if employees are getting fewer options, are they going to be less motivated to improve the performance of their companies and therefore will their stock prices not go up as much as they would have?"

"I think stock options work, in terms of motivating employees at all levels to do the big and the little things to improve the financial performance of their employers," he added.