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IBM Corp.’s announcement that it will begin expensing employee stock options earlier than regulations require has sent a chill through Silicon Valley, where most tech companies are hoping for a reprieve from the new accounting standard but may now feel greater pressure to comply. “A lot of tech companies don’t want to do this [expense options] until they absolutely have to,” said Rob Haralson, spokesman for the American Electronics Association, a Washington-based trade association that represents technology companies. Accounting rule FAS 123R, which takes effect with the fiscal quarter that starts after June 15, is the product of a years-long debate about whether options issued to employees but not yet exercised should be counted as a cost to be subtracted from earnings. The Financial Accounting Standards Board decided in December to implement the expensing rule, which will be enforced by the Securities and Exchange Commission. Smaller tech companies fear IBM’s move weakens their argument that the rule unfairly punishes the tech industry, where options are a widespread form of compensation. So far, they note, most of the 850 companies that have complied with the rule grant options only to top management. “But IBM is different,” Haralson said. “This is a big deal. They give options to everyone.” IBM said it will start complying with its first-quarter earnings report on April 18 and that it will restate past earnings to ease comparison between pre- and post-expensing results. Many tech companies are holding out hope for regulatory relief that would allow them to continue reporting options in the footnotes of financial statements rather than subtracting them from profits. People close to the SEC said it is considering a six-month delay in implementing the rule. That would give opponents time to lobby Congress for a suggested three-year moratorium on the accounting changes. “We respect IBM’s decision, but this rule affects 14 million people,” said Jim Hock, a spokesman for the International Employee Stock Options Coalition. Hock said all companies need “clarity and consistency” that the new rule lacks. The key debate is over what formula should be used to calculate the value of outstanding options, though the SEC on Tuesday, April 5, said it would allow companies to use more than one of several prescribed methods. Companies that don’t already expense options are expected to footnote them for their first half of the year, then start expensing in the second half unless there is delay. Only a handful of tech companies, including software giant Microsoft Corp. and online movie rental company Netflix Inc., are so far complying with the rule. Opponents of expensing say it will reduce the reported earnings of thousands of companies and in some cases turn profits into losses. A recent study by financial services concern Bear Stearns Cos. found that expensing would slash post-tax earnings by an average of 22 percent for companies in the Nasdaq 100 and by 5 percent for companies comprising the S&P 500. The analysis by Bear Stearns was compiled from the 2004 stock option disclosures in the 10-Ks filed by companies listed on the S&P 500 and Nasdaq 100 indexes as of Dec. 31, 2004. According to the report, the hardest-hit would be Irvine, Calif.-based Broadcom Corp., whose estimated 2004 results would swing from a profit of 63 cents a share to a loss of $1.20. Separately, Allentown, Pa.-based chipmaker Agere Systems Inc. said the expensing rule would have more than doubled its 2004 loss, to $227 million from $90 million. To be sure, not everyone is so sure that IBM’s decision will set a precedent, partly because many people no longer consider it a tech company. “We don’t really see other companies following IBM’s lead,” said Jeff Peck, a partner in Washington law firm Johnson Madigan Peck Boland Dover & Stewart Inc. and chief lobbyist for the IESOC. “Companies are waiting for the SEC.” Copyright �2005 TDD, LLC. All rights reserved.

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