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Technology companies are opening a new line of attack in hopes of quashing a plan to require companies to account for employee stock options. With little hope of Congress passing legislation to block the Financial Accounting Standards Board’s proposed options-expensing rule before lawmakers adjourn for the year, a detachment of high-tech executives are making their way to the group’s headquarters in Norwalk, Conn. Their mission: to lobby for what they contend is a fairer way of valuing options, a major point of contention among critics of FASB’s proposal. Representatives from Cisco Systems Inc., Genentech Inc. and Qualcomm Inc. are scheduled to meet with FASB board members on Wednesday to present the fair value index-adjusted method. Stock options vary from company to company in terms of maturation, strike price and other attributes, said Kim Boylan, an attorney with law firm Latham & Watkins who helped develop the system. FASB, a private organization that sets standards for accounting and financial reporting, has failed to offer detailed instructions about how to account for these differences in valuing options. “FASB hasn’t given any guidance into the unique attributes of ESOs [employee stock options],” Boylan said. “This is an attempt to say, ‘If you’re expensing options, this might make sense.’” How best to value employee stock options has been a large sticking point in the debate over whether to require companies to treat them as a business expense. Opponents of FASB’s proposal say current valuation models are inaccurate, which will lead to faulty financial reporting. The technology companies said the fair value index-adjusted method addresses stock options’ unique attributes better than the standard methods outlined in FASB’s proposal. The fair value approach is based on the commonly used Black-Scholes system of valuation and also factors in the date and the value when an option is granted, as recommended by FASB. It also uses some of the same variables used to value options outlined in the board’s plan, including strike price, current share price, risk-free interest rate and dividends. But it differs from other models by using a company-specific volatility index based on the “beta-adjusted” Standard & Poor’s 500 index. Adjusted beta is a widely used measurement of a company’s expected future volatility relative to an index. Companies could adjust the beta for one, two or three years, depending on what they believe is more predictive of future volatility. “Our model is really transparent,” Boylan said. “It allows an investor to verify what the company said is correct, and it’s easy to use.” In its March proposal, FASB singled out one method as “preferable” for estimating the value of a company’s options. The approach, which makes use of a “binomial tree,” or “lattice,” model, incorporates more data than Black-Scholes, providing what supporters say is a more accurate and refined valuation. But many companies and their auditors argued that FASB should eliminate the explicit preference, partly because not all companies have or even need the information required of the more data-intensive lattice models. In addition, companies themselves should have the flexibility to assess the costs and benefits of all the available models. As a result, at a recent meeting the board tentatively decided not to favor any particular model in its final standard on expensing. Companies, the board said, bear the responsibility to apply the best tool. Although the technology group is proposing an alternative valuation method for stock options, it remains strongly opposed to FASB’s plan to require companies to expense options. But they hope that lawmakers will consider the new valuation model. “This makes it crystal clear to all members, especially the Senate, that at least some companies are willing to meet FASB far more than half way to see if this could be resolved” said Jeff Peck, chief lobbyist for the International Employee Stock Options Coalition, a Washington-based lobbying group. Copyright �2004 TDD, LLC. All rights reserved.

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