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The House Committee on Financial Services overwhelmingly passed controversial legislation Tuesday that would curb the Financial Accounting Standards Board’s authority to require the expensing of stock options. The Stock Option Accounting Reform Act, crafted by Richard Baker, R-La., and chairman of the House Financial Services Capital Markets Subcommittee, was approved by a 45-13 vote. The measure requires companies to count as an expense only the options granted to the five highest paid employees. The bill also requires the Securities and Exchange Commission and the Labor Department to jointly study the economic impact of stock-option expensing. In addition, the committee passed an amendment sponsored by Rep. Brad Sherman, D-Calif., which requires completion of the study within a year after the bill is enacted. Despite the committee vote, the bill faces many hurdles. It must clear the full House and Senate. That could be a problem because Senate Banking Committee chairman Richard Shelby, R-Ala., has said Congress should not interfere with FASB’s rulemaking decisions. The committee acted despite a plea Monday from the Financial Accounting Foundation, parent of the FASB, which warned that overturning the proposal would compromise the integrity and credibility of the U.S. financial reporting system. Sherman, a critic of the legislation, along with Reps. Paul Kanjorski, D-Pa., and Carolyn Maloney, D-N.Y., tried several times to kill the bill with amendments. Kanjorski said before the bill passed that members of the subcommittee should consider his alternatives to “preserve the independence of FASB.” Kanjorski said Congress was setting a bad precedent by essentially becoming the appellate court for FASB decisions. One amendment he proposed would have instructed the SEC to oversee the process of setting share-based compensation standards. Maloney’s amendment would have given the SEC authority to set accounting standards. Opponents of the FASB proposal were overjoyed. Rick White, chairman of the International Employee Stock Options Coalition, said in a statement that the committee had taken a more targeted approach that strikes a sensible and appropriate middle ground. Passage of the bill is a significant step in preserving employee stock options for the rank and file, he said. “We applaud the numerous Republicans and Democrats alike who have united on this vital issue in such bipartisan fashion,” White said in the statement. He added that employee stock options fuel innovation and economic growth and that the “Republicans and Democrats who voted for this legislation today recognize that employee ownership is an American value that should be preserved, not destroyed.” The committee, chaired by Michael Oxley, R-Ohio, will send the bill to the House floor with a recommendation to approve. However, Rep. Barney Frank, D-Mass., who voted against the measure, said he would continue the fight on the House floor. Companies now have a choice whether to recognize stock-option compensation as an expense on their income statements. Those opposed to FASB’s efforts have said treating options as an expense would harm cash-poor startups and deter companies from issuing options to all employees. They have also challenged whether there is a reliable way to value stock options. Proponents of expensing stock options have argued that they are a real cost to a company’s existing shareholders and should be recognized on its income statement when they are granted. FASB has scheduled two days of public meetings to discuss the options expensing proposal. The first meeting will be held June 24 in Palo Alto, Calif.; the second is scheduled for June 29 in Norwalk, Conn., a day before the comment period expires. Copyright �2004 TDD, LLC. All rights reserved.

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