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The ink is barely dry on new rules governing the treatment of employee stock options and already opponents are preparing to lobby the new Congress with an eye toward derailing them. “Since [the Financial Accounting Standards Board] is moving ahead with its fundamentally flawed proposal, we will continue to aggressively lobby the U.S. House and Senate to seek an appropriate legislative solution in the 109th Congress,” said John Palafoutas, senior vice president of domestic policy for the AeA, a Washington-based technology trade association. After two years of bitter fighting, FASB published a controversial, 27-page rule on Dec. 16 that forces companies to deduct the cost of employee stock options from profits. Many in the high-tech sector say the accounting standard will seriously curtail their operations and cut their reported profits because of their heavy use of stock options as a compensation tool. FASB “is continuing to disregard the legitimate concerns of the high-tech industry,” Palafoutas said. Yet the rule doesn’t take effect until June 15, giving opponents time to mount their campaigns in Congress and at the Securities and Exchange Commission, both of which could override it. Critics of the rule believe the 2004 election victory by Republicans improves the chance that policymakers will block options expensing. “There’s a huge number of members whose interest [in blocking the stock option rule] is not going to cease,” said Jeff Peck, chief lobbyist at the International Employee Stock Option Coalition, a Washington-based advocacy firm. House Minority Leader Nancy Pelosi, D-Calif., called FASB’s action regrettable and said that if the SEC didn’t force the accounting board to rethink its rule, Congress might get involved “through oversight, legislation or both.” FASB’s rule-making is supposed to be free of political interference, yet lawmakers contend they are justified in intervening since the accounting standard-setter gets its authority from the SEC which, in turn, gets its power from Congress. So far, none of the rule’s congressional opponents, while critical of FASB’s ruling, have indicated whether they will reintroduce legislation in 2005 to override it. “I will have to thoroughly study the release before I can determine what legislation may be necessary in the next Congress,” said Senate Banking Securities and Investment subcommittee Chairman Michael Enzi, R-Wyo., chief sponsor of a bill last year that would have muted FASB’s authority. The House in July passed a bill similar to Enzi’s by an overwhelming margin. The measure introduced by Rep. Richard Baker, R-La., requires companies starting in 2005 to report the value of stock options granted only to their five top executives. Businesses with less than $25 million in annual revenue would be exempt from the requirement, while newly public companies would be exempt for three years. The bill also bars the SEC from recognizing any new rules on stock-option accounting pending completion of a joint economic study by the Commerce Department and the Labor Department. However, Senate Banking Committee Chairman Richard Shelby, R-Ala., and several other longtime proponents of option expensing cheered the board’s move and are urging their colleagues not to fiddle with the accounting board’s independence. “It is critically important to keep U.S. accounting rules out of politics, which means allowing the experts at FASB to do their work,” said Sen. Carl M. Levin D-Mich. To date, Shelby has been able to prevent the anti-expensing bill from reaching the Senate floor and has vowed to fight any legislative effort to block FASB’s options rule next year, a Banking Committee spokesman said. “Sen. Shelby continues to believe that Congress should not interfere with FASB’s determinations,” the spokesman said. But that could change with the 109th Congress since several newly elected Republicans are said to support diluting the expensing rule. “Our ranks have been substantially increased by incoming Republican senators like Richard Burr [R-N.C.], Jim DeMint [R-S.C.] and David Vitter [R-La.],” Peck said. “In fact, incoming Minority Leader Harry Reid of Nevada is a co-sponsor of the Enzi bill, and staunch expensing proponent Sen. Peter Fitzgerald [R-Ill.] has retired.” No doubt the pressure will be on Congress to decide which argument has greater veracity. Supporters of expensing options will argue that the new standard will improve accounting transparency and corporate accountability. Critics will say it has a wide-ranging economic impact and discourages companies from offering stock options plans that help attract and retain talented workers. “FASB should have required the thorough economic evaluation of its proposal to find out its implications on small businesses and our economy as a whole, but it didn’t,” Enzi said. Still, overturning the rule will be no easy feat. FASB, after a decade of fighting to adopt an option-expensing rule, is standing its ground. “Those who oppose mandatory expensing have lobbied quite vigorously, and that is their right, but we need to fulfill our role, and that’s what we intend to do,” said FASB chairman Robert Herz. The SEC has also thrown its support behind FASB. Donald Nicolaisen, the SEC’s chief accountant, said in a prepared statement that companies should focus their energy on implementing the plan and that the SEC is “preparing to provide appropriate guidance” to help companies comply with the standard. Copyright �2005 TDD, LLC. All rights reserved.

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