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The Financial Accounting Standards Board is expected this week to propose a rule requiring companies to treat stock options as an expense on their balance sheet. The rule, if approved by the Securities and Exchange Commission, would force companies to deduct the cost of employee stock options from corporate profits, which proponents say would give investors a clearer picture of an enterprise’s financial condition. Currently, companies may either record the cost of options as an expense on their income statements or include the potential cost in a footnote. FASB, a private organization that sets U.S. accounting standards, also this week will issue guidelines on how to calculate the value of stock options. Corporate leaders, including many in the technology industry, and some lawmakers say expensing options is impractical because the mathematical models used to value them are imprecise. FASB tried to mandate option expensing a decade ago but backed down under congressional pressure and heavy lobbying from business groups. And once again, the board’s latest plan is eliciting protest from corporate leaders, who are descending on Capitol Hill this week to plead their case. The American Electronics Association is sponsoring a “fly-in” today so executives from high-tech companies can pressure Congress, White House officials and the SEC to override FASB’s plans. Participants are expected to include Agilent Technologies Inc., Cisco Systems Inc., Dell Inc., Intel Corp. and Sun Microsystems Inc. Opponents of mandatory expensing argue that options are essential for attracting and retaining top employees and are a way to reward rank-and-file workers. But booking options against earnings would severely hurt corporate profits, they claim. “Expensing stock options will make it too expensive for many companies to continue these plans,” said John Palafoutas, senior vice president of domestic policy and congressional affairs for AeA, a Washington trade association representing electronics companies. “We’re opposed to expensing and want to see a demise of the plan.” Instead, the AeA is supporting legislation currently before the House and the Senate that would require companies to account for options only for their top five executives. Others take issue with the assertion that expensing options will be prohibitively expensive. “I may be proven wrong, but the argument is not convincing because everyone will have to play by the same rules,” said Tim Luerhman, managing director at Standard & Poor’s Corporate Value Consulting. Although FASB faces stiff industry opposition on its proposal, it received a boost in February when the International Accounting Standards Board, which sets accounting rules outside the U.S., proposed mandatory expensing. Roughly 500 U.S. companies, including Microsoft Corp. and General Electric Co., have started expensing options voluntarily. Driving the push for expensing are investor demands for greater transparency in corporate financial statements. Many also believe that booking options will make it more difficult for executives to manipulate earnings to inflate a company’s stock price. Supporters of FASB’s proposal say options should be recognized as a cost of doing business in the same way other forms of employee compensation are. “If stock options aren’t a form of compensation, what are they?” asked billionaire investor Warren Buffett in a recent speech. “If compensation isn’t an expense, what is it? And if expenses shouldn’t go into the calculation of earnings, where in the world do they go?” Copyright �2004 TDD, LLC. All rights reserved.

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