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House Votes to Block Stock Option Expensing

The U.S. House of Representatives approved legislation Tuesday strongly supported by the tech industry to pre-empt a proposed federal accounting regulation calling for corporations to deduct the cost of all employee stock options from their profits.

The bill, the Stock Option Accounting Reform Act (H.R. 3574), mandates the expensing of stock options granted to the CEO and the next four most highly compensated officers of a company but exempts the expensing of stock options for all other employees.

The legislation, proposed by the Financial Accounting Standards Board (FASB), also allows newly incorporated companies to delay any expensing of stock options for three years and requires the Securities and Exchange Commission to develop additional stock options-related disclosures.

Despite the House action, the future of the legislation remains cloudy, as the Senate has shown little interest in overriding the FASB proposal.

Stock options have long been a popular form of compensation for tech-industry employees, particularly for start-ups with little cash to attract talent. TechNet, the influential 150-member exclusive network of technology CEOs and senior partners founded by venture capitalist John Doerr, has lobbied hard to overturn the FASB ruling.

In March, the FASB, an independent board that establishes accounting practices, alarmed many in the tech community with its proposal to require publicly traded companies to expense all forms of share-based payments to employees. The FASB proposal came in the aftermath of accounting scandals at Enron and WorldCom.

The FASB proposal is set to become a standard accounting practice after Dec. 15 and has drawn the support of Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson and billionaire investor Warren Buffett.

"FASB rulemaking should be halted if it is going to be harmful to the economy," said Rep. Michael Oxley (R-Ohio), chairman of the House Financial Services Committee. "Stock options have been and remain a very strong facet of our economy."

Opponents of the FASB standard contend that expensing all stock options will result in misleading income statements since it is difficult to assign a certain value to stock options and discourage companies from granting options to employees.

"This is not just some green eyeshade accounting issue. Stock options are a magnet that attracts workers to a company," Rep. Anna Eschoo (D-Calif.) said. "This [bill] is about protecting a tool that has paid off for the rank-and-file workers of this country."

Rep. David Dreier (R-Calif.) added that "Nowhere have stock options been more effective than in the technology sector. Stock options do not cost a company money, but they do have an impact on share value. This bill has language that requires the disclosure of the total number of options outstanding. FASB is just plain wrong."

Oregon Democrat Earl Blumenauer warned that the FASB rule would "make it much less likely we'll have programs like this [stock options] in the future and eliminate some current ones."

Currently companies are only required to include the potential bottom line impact of stock options on their financial statements in a footnote, although a number of corporations, including Microsoft and Amazon , have stated they will begin expensing stock options.

"Why hide an expense?" asked Rep. Carolyn Maloney (D-N.Y.). "Simply put, it is an expense or it is not an expense. This bill hurts investors and the financial markets."

Rep. Pete Stark (D-Calif.) called the bill "sheer lunacy. Let's help the rich get richer. Right now, companies can deduct [the cost of stock options] for income tax purposes but don't have to report that value to shareholders."

The legislation also encountered harsh criticism for assuming no change in the price of the stock options required to be expensed.

"This bill has so many flaws that it can't possibly work in the real world. It makes no sense at all. It assumes no volatility of stock price. What sense does that make?" said Rep. Ed Markey (D-Mass.).

Rep. Paul Gillmor (R-Ohio) said the "real issue is whether we want to politicize accounting standards. Stock options should be honestly stated as expenses."