Complexity Over Opacity

In a triumph of complexity over opacity, the FASB ruled in favor of not deciding on any particular method for valuing stock options in financial reporting. This ruling is part of a larger effort to create a standard set of accounting requirements for reporting employee stock option costs. But now we'll trade "not knowing" with "thinking we know" and I'm not sure which is worse.

The movement to standardize a set of reporting requirements (a subject we also wrote about here and here) has been delayed over the specific issue of how to value the options. So far the solution has been not to decide on a process but instead a destination. As reported by Dow Jones:

At a meeting Tuesday with Wall Street analysts and portfolio managers, FASB officials said the seven-member board has decided not to designate one particular option-pricing formula in an option-expensing standard it expects to propose by February. Rather, board officials said, an objective would be specified in the proposal, which is to measure how much a stock option is worth at the time it is granted.

This means that a company could choose either a "binomial" model or the commonly-used Black-Scholes, depending on which one is the most applicable for them when valuing the options. A binomial model incorporates more data than Black-Scholes, information such as how soon employees are likely to exercise their options.

Much as the alternative minimum tax created twice as much work for accountants, this would seem like a recipe for "valuation shopping" where companies end up calculating stock option value all possible ways and then figure out how to justify the most favorable. I don't understand how this will create any sense of transparency in financial reporting or that we will have any more ability than before to accurately judge the financial statements of one company against another.