Moody’s Investors Service says that many companies will be reporting lower earnings inn the first quarter due to options expensing, but ratings will not be affected.

“Many companies will be reporting earnings lower than they otherwise would be during the first quarter of 2006 because this is the first quarter they are required to begin recognizing all costs associated with share-based compensation as an expense,” it notes. However, Moody’s Investors Service says these lower numbers will have no impact on ratings, since it has been its practice to adjust financial statements and credit metrics to include the cost of this compensation.

Moody’s estimates that expensing stock options last year would have reduced aggregate net income of rated non-financial corporate issuers by 7.7%. Industries with the highest percentages of unrecognized share-based compensation expense last year (after taxes) included media (24.2%) and technology (also 24.2%).

With those companies reporting on a calendar-year basis required to recognize these costs as expense this quarter, “companies will likely continue to focus their attention on ‘management’ of the expense amount,” says Moody’s vice president/senior credit officer Mark LaMonte. “Key assumptions and other factors driving expense amounts will require additional analytical scrutiny.”

Moody’s says it already has seen some evidence that companies that will report this compensation as an expense for the first time, have, in general, been moving towards ways to reduce the expense. On average, Moody’s says, 2005 pro forma expense amounts were 4% lower than 2004 pro forma amounts.

LaMonte notes that techniques to avoid or reduce stock compensation expense, at least for the first few years of the new accounting standard, are “causes of concern.” These techniques include accelerating the vesting of out-of-the-money stock options and modifying options issued previously. “Many companies will modify their employee compensation schemes in response to the new share-based compensation expensing rules. We will consider the impact of these changes on our credit ratings as they develop,” says LaMonte.