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Having recently proposed requiring companies to account for employee stock options, the Financial Accounting Standards Board is now turning its attention to how options should be treated in mergers and acquisitions. At its regular meeting Wednesday in Norwalk, Conn., FASB board members discussed how companies should deal with changes in stock options resulting from a deal. Of concern is the effect on a company’s accounting when it replaces options held by employees of a recently acquired business. In particular, the board wants to address how companies should book options that have different terms than the ones being replaced. FASB is considering these issues as it works on a broader proposal dealing with business combinations. One major issue under discussion is whether companies should be required to reflect the cost of replacing stock options in the price of a deal. Ron Bassio, FASB project manager of business combinations, said the board decided that acquirers must consider as part of their compensation costs the difference between the value of employee options at the acquired company issued prior to the deal and the cost of replacing those options with new awards. In related matters, board members are weighing how to evaluate contingent payments that are the result of a business combination and ultimately are settled by the issuance of stock. These payments are currently measured at their fair value as of the grant date of the contingent payment and are not remeasured. The recent proposal on expensing and valuing stock options allows for the adjustment of the value based on the actual performance of the stock. A similar approach could be applied to contingent payments. The discussion is part of the second phase of a joint project between FASB and its European counterpart, the International Accounting Standards Board, on harmonizing accounting rules. This part of the effort is aimed at revising the existing guidance related to the treatment of mergers and the application of the purchase method of accounting in order to improve the transparency of information to users of financial statements. Last week the IASB released the first of the new standards to emerge from the joint project with FASB. The rule on accounting for acquisitions and asset disposals is similar to existing U.S. financial reporting rules. The IASB’s standard on business combinations now bans the “pooling” method that enabled companies to inflate their earnings. It also bans goodwill amortization. Copyright �2004 TDD, LLC. All rights reserved.

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