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The Financial Accounting Standards Board is putting the final touches on a rule that, by the end of this year, would require companies to recognize the cost of options on their income statements. The seven-member board has been redeliberating a number of aspects of its proposal and at its regular meeting Wednesday, Sept. 8, voted to adopt a different accounting treatment for employee stock purchase plans, or ESPPs, than originally contained in its March 2004 exposure draft. FASB’s change of heart has the potential of lessening the expense recorded by companies in connection with stock sold to ESPPs. In its original proposal the board suggested that any discount or benefit offered to employees through an ESPP that is unavailable to all stockholders represents a compensation cost to employees, and therefore should be recorded as an expense. Some critics of the proposal voiced concerns that companies would begin to discontinue or scale back ESPPs if they were forced to record such an expense. Under the new approach an ESPP would not be required to record a compensation cost if certain conditions are met. Terms of the plan must not be more favorable than that which is available to all holders of the same class of shares, or, any discount for the purchase of shares under the plan results in proceeds to the employer that are not less than what it would receive in an offering by a third party, for example, an underwriter. In addition, a discount of 5 percent or less from the market price shall be allowed without penalty or justification. Other terms require that substantially all eligible employees who meet limited employment qualifications may participate on an equitable basis; and the ESPP incorporates no option features. For example, a plan in which the purchase price is based on the stock’s market price at date of grant and that permits a participating employee to cancel participation before the purchase date and obtain a refund of amounts previously paid is a compensatory plan. The board will continue to discuss other aspects of the proposal and is also expected to 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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