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After more than a decade of debate and political wrangling, mandatory expensing of employee stock options in the United States is just about a done deal. In what is seen as the final hurdle to implementing new Financial Accounting Standards Board rules requiring companies to recognize stock options as an expense, staff from the Securities and Exchange Commission’s office of the chief accountant issued a bulletin Tuesday offering guidance on the rules. The SEC staff said it issued the guidelines to help companies comply with the new rule and assist investors in analyzing the information. Central to the SEC’s bulletin is flexibility. The SEC said it believes companies “can choose from a number of models” when estimating the fair value of stock options, and offered examples for applying such models. The SEC added that it would not object to reasonable fair value estimates of the options that were made in good faith, even if subsequent events proved other estimates more accurate. This should ease the fears of many companies that worry they will be sued or subject to regulatory action if their initial valuation estimates turn out to be wrong. Expensing of employee stock options is not a requirement now, but the FASB has recommended that it become mandatory from June 15. The SEC document provides a fillip to the FASB rules, which have drawn the ire from several groups that use options to attract and retain employees, including high-tech companies that have feverishly lobbied to quash the rule in Congress. The House of Representatives overwhelmingly passed a bill blocking the rules last year, but efforts to pass the measure in the Senate have been stifled by Banking Committee Chairman Richard Shelby. The Alabama Republican said in a statement Tuesday that the SEC guidelines “will help ensure that the public receives fair, accurate and objective financial information in a timely manner.” Nevertheless, tech companies have been fighting the stricter rules and argue that current valuation models are unworkable. “We still believe that FASB’s mandatory expensing standard is fundamentally flawed, but I’m pleased to see that the SEC is trying to address some of the valuation problems with the standard,” said Rick White, president of the International Employee Stock Options Coalition. The SEC, White added, has just issued “60 pages of guidance, which suggests that this is a very technical and complex issue.” He added that FASB’s mid-June deadline remains “a problem.” He said companies are already struggling to meet the demands imposed by the new Sarbanes-Oxley financial reporting requirements and urged a delay in implementing new accounting treatment for stock options. Copyright �2005 TDD, LLC. All rights reserved.

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