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A new front is opening in the battle between the business establishment and the Financial Accounting Standards Board over how to compensate employees with company stock. Like the clash over how companies should account for stock options, this new dispute centers on when to treat employee compensation as an expense. At risk are employee stock purchase plans, which typically permit workers to buy company stock at a discount, usually 15 percent, through payroll deductions. FASB, a private organization that sets standards in the U.S. for financial accounting and reporting, voted Wednesday to limit the discount to 5 percent. Any excess amounts must be treated as a compensation expense, which would be deducted from a company’s net income. Business activists ripped FASB’s plan. “It’s going to be harmful not only to tech companies but any company that provides an employee stock purchase plan,” said Rob Haralson, a spokesman for the American Electronics Association, a technology company trade organization based in Washington. Yet FASB’s decision Wednesday already marks a partial retreat for the board, which had initially proposed requiring companies to treat all stock purchase discounts as a compensation expense. Stock purchase expensing rules have drawn little attention because they were included in a hotly debated proposal requiring companies to recognize the cost of employee stock options on their income statements by year’s end. In its original proposal, FASB said that any discount or benefit a company offered to employees through an ESPP that is unavailable to all stockholders amounts to worker compensation, and therefore should be recorded as an expense. Critics attacked the plan, asserting that companies would discontinue or scale back ESPPs if they had to record them as an expense. Under FASB’s new approach, companies may not allow employees to buy stock through an ESPP at better terms than what is available to other shareholders. Also, any discount offered to workers to buy stock should not result in the company receiving less than what it would collect in a third-party offering, such as from an underwriter. Finally, a company can give employees a stock purchase discount of 5 percent or less from the market price of the shares without having to record the cost as compensation. Despite the compromise, the private sector is unlikely to be appeased. Dorothy Coleman, vice president of tax policy for the National Association of Manufacturers, an industrial trade group, said FASB’s move is “a step in the right direction, but we do not view stock purchase plans as expenses, and we don’t agree that they should be expensed at all.” Although the effect of the rule on individual companies will be hard to gauge, Coleman also contends it will raise corporate costs for providing stock purchase plans. FASB will continue to discuss other aspects of the proposal and may consider delaying implementation of the rule. A number of companies have requested the delay because they are already preparing to comply with new internal control reporting systems required under the Sarbanes-Oxley Act. Copyright �2004 TDD, LLC. All rights reserved.

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