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Accounting rule makers issued a standard last week that forces companies to expense employee stock options starting in June, ending 10 years of political wrangling and backpedaling. The Financial Accounting Standards Board now will require companies to deduct from earnings the cost of giving employees the right to buy stock at a predetermined price within a certain time frame. “Our new standard was unanimously approved by all seven board members and will provide investors and other users of financial statements with more complete and unbiased financial information,” said FASB Chairman Robert Herz. Despite the vote, the future of the rule remains in doubt. Opponents of stock-option expensing say they will continue to pressure Congress, the Securities and Exchange Commission and the Bush administration to ensure that the rule does not impede economic growth and job creation. They also want to preserve broad-based stock-option plans. “Whether it’s through legislation or letters, we want a regulatory environment where the rank-and-file can own a piece of the rock, there’s a consensus on an accurate valuation model that’s been tested and we maintain a lead in innovation in entrepreneurship,” said Jeff Peck, chief lobbyist for the International Employee Stock Options Coalition. Overturning the rule is not a slam dunk. FASB, after seeing prior efforts to adopt stock-option expensing rules get derailed, appears willing to fight to preserve the standard. “Those who oppose mandatory expensing have lobbied quite vigorously, and that is their right, but we need to fulfill our role, and that’s what we intend to do,” Herz said. Until now, companies could note the value of options in the footnotes of financial statements. Approximately 750 companies, including Microsoft Corp. and Home Depot Inc., are ahead of the game and already expensing options. But others, for the most part high-tech companies, have feverishly lobbied to get the rule quashed in Congress. These companies, which have generously awarded options to their employees, argue that expensing will deter businesses from issuing options as a form of compensation, stifle job creation and innovation and make it harder to attract and retain talented executives. The IESOC, a trade association that supports the status quo, argues that the new accounting standard is not workable. “FASB’s new expensing standard simply will not work,” said Rick White, chairman of the IESOC. White said that the models FASB has mandated to value stock options are so confusing and open to interpretation that they are not even auditable. But Stamos Nicholas, a principal in the valuation practice of Deloitte & Touche LLP, one of the Big Four accounting firms, disagrees. Stamos contends that expensing will be of enormous benefit to investors. “It is measurable and auditable and the right thing for the investing public.” FASB is flexible on which valuation model is best and is leaving that decision up to individual companies, Nicholas added. But companies “need to be able to defend it when they file their financial statements to the SEC,” he said. Herz said FASB decided not to recommend a particular valuation model because every company needs to base its assumptions on company-specific factors. “We are offering guidance on how options should be valued, but have not specified a specific valuation method,” he said. Copyright �2004 TDD, LLC. All rights reserved.

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