An Inconsistency in the Method of Accounting for Changes in Estimate : Variable Stock Plans

The accepted method of accounting for a change in accounting estimate requires that any over or under expense related to years prior to that change be allocated to current and affected future periods. A change in accounting principle requires that any over or under expense related to years prior to that change be recognized in the year of change.Variable stock plans require estimation of a future market price-the market value at the measurement date. The amount of this estimate may change each year. FIN 28 uses the catch-up method (as for a change in accounting principle) to account for these changes over the service period or vesting period of stock option awards. However, this treatment is not consistent with the treatment applied to other changes in accounting estimate as discussed in APB 20. Should changes in accounting estimate re-lated to variable stock plans be accounted for using the prospective method? This would seem to be more consistent with previous rules of GAAP (i.e., APB 20). However, perhaps there is a more fundamental issue to consider - the usefulness of a measurement approach in reporting an event and its ability to achieve consistent and comparable measures of income.Currently, the FASB is planning to issue an exposure draft on accounting for stock compensation plans. However, over two years have passed since the comment deadline passed on this discussion document, and release of an exposure draft on the subject was postponed each quarter during 1986. As the FASB continues to study this issue, it should consider the position it stated in paragraph 16 of FIN 28: the method of measuring compensation for stock appreciation rights and other variable plan awards should not be changed without a comprehensive reexamination of the measurement principles underlying APB Opinion No. 25. We believe that FASB should reexamine the entire issue of measurement, including the method applied and the circumstances under which that method best reflects operating income when variable stock options are used as compensatory rewards. This review should include APB 20 and the relative importance of consistency among approaches used versus other considerations such as the matching of costs and income measurement