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The Financial Accounting Standards Board said Tuesday that smaller companies will get an extra 12 months to prepare to expense employee stock options. Small public companies, as defined in the Securities and Exchange Commission’s listing requirements, will report stock options as costs for fiscal quarters beginning after Dec. 15, 2005. In addition, privately held companies will expense options for fiscal years starting after the same date. Both requirements were scheduled to take effect on the same date this year. The board’s decision comes a week after it gave public companies until June 15 to start expensing options, a delay of six months from the initial proposal. FASB, which sets U.S. financial reporting and accounting standards, also directed its staff to write the final version of the expensing rules, a move that suggests additional changes are unlikely. That is likely to disappoint critics of the regulations, who had hoped the agency would use the extra time to re-evaluate its approach to option expensing. “A delay removes only the immediate threat to our country’s small, privately held companies that will be irreparably harmed by the FASB stock option expensing mandate,” said Mark Heesen, president of the National Venture Capital Association, an Arlington, Va.-based trade association that represents the U.S. venture capital industry. Small companies complain that FASB has not adequately tested whether the complex models used to value stock options produce reliable results. These entities will be especially hard hit if the models produce misleading results because they are not covered by research analysts, who conduct their own review of companies’ finances. They also cannot afford experts to study the impact of options expensing on the balance sheet. Heesen said he hopes FASB’s delay means the board finally understands the difficulties small companies will have implementing options expensing. “We hope the extra time will be used by the FASB and the SEC to field test the impact of this proposal on small, privately held companies and further explore its ramifications on the U.S. economy.” The battle over whether to expense employee stock options has been raging since the scandals erupted at Enron Corp. and WorldCom Inc. Opponents argue that forcing companies to expense options will result in unreliable financial statements. Advocates counter that the mandate will give investors a clearer view of a company’s finances. Lawmakers are expected to use the extra time to push legislation that would void FASB’s option expensing requirement. Copyright �2004 TDD, LLC. All rights reserved.

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