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U.S. accounting rulemakers agreed Wednesday to postpone a proposal requiring public companies to deduct the cost of employee stock options from their earnings, throwing into doubt a plan aimed at clarifying corporate reporting. The Financial Accounting Standards Board said the proposed rule would take effect on June 15, 2005, or in the third quarter for those operating on a calendar year. The initiative was set to take effect beginning Jan. 1. The group also agreed to allow, but not require, public companies to restate their profits for the first two quarters of 2005 to reflect options-related costs. FASB Chairman Robert Herz said the six-month delay is aimed at reconciling private sector concerns about complying with the expensing mandate and those of investors calling for greater corporate transparency. The board’s expensing proposal has sparked a firefight between advocates of better corporate accounting and business groups. The high-tech industry, a major issuer of options, has been especially aggressive in lobbying lawmakers to halt the rule, arguing that mandatory expensing would force them to stop offering options as compensation. Although Securities and Exchange Commission Chairman William Donaldson has voiced support for options expensing, Donald Nicolaisen, the agency’s chief accountant, recently spoke in favor of delaying the rule because companies and auditors continue to implement new internal control systems mandated under the Sarbanes-Oxley Act of 2002. The SEC oversees FASB, a private organization based in Norwalk, Conn. George Batavick, chairman of FASB’s Small Business Advisory Committee, said the group should consider postponing the standard for up to a year. “If we provide more time, [companies] will have more time to educate investors as to the impact on the balance sheets,” he said. Batavick added that greater testing on the potential impact of expensing will help shareholders determine how much options grants cost a company. Industry observers suggested FASB is deferring the rule to avert congressional trespassing on its rulemaking authority. “Left to its own devices, FASB would have stuck with its timetable,” said Jeffrey Peck, a partner at Washington lobbying firm Johnson, Madigan, Peck, Boland, Dover & Stewart and chief lobbyist for the International Employee Stock Options Coalition, which opposes FASB’s proposal. “Clearly, something has changed to move them away from the Jan. 1 date.” Despite FASB’s move to temporarily shelve its options plan, Kurt Schacht, executive director of advocacy at the CFA Institute, expressed confidence that the plan would eventually be adopted. “They’re delaying the implementation date, not the expensing proposal, so we’re not worried,” he said. Yet some expensing proponents worry that a delay might give foes of the plan time to mobilize congressional support to block the rule. The House in July passed a bill that would limit expensing to options granted to a company’s top five officers. Although the measure faces significant roadblocks in the Senate, the legislation is gaining momentum. Last week, 53 senators sent letters to Donaldson urging the SEC to study and field-test various options valuation models. FASB dismissed on Wednesday an alternative method for valuing options recently proposed by technology companies including Cisco Systems Inc., Genentech Inc. and Qualcomm Inc. The board said it will recommend commonly used valuation formulas such as the Black-Scholes and “binomial” models. The three technology companies favor adjusting certain assumptions in Black-Scholes, such as estimates of a stock’s volatility and of how long employees would keep their options. Such an approach would significantly reduce the hit to earnings caused by expensing options. “Rather than take the time to seriously consider a new simplified and standardized valuation method proposal by Cisco, Genentech and Qualcomm, FASB rejected it out of hand in a discussion that lasted 28 minutes,” said Rick White, chairman of the IESOC, in a statement. Schacht dismissed the claim, saying that the companies’ proposal was a “gimmick” to disguise the cost of options. Copyright �2004 TDD, LLC. All rights reserved.

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