- The Washington Times - Thursday, December 16, 2004

NEW YORK (AP) — The nation’s accounting rule maker decided yesterday that companies will have to begin deducting the value of stock options from their profits next year, a move cheered by shareholder advocates but scorned by many companies that rely heavily on options to beef up compensation packages.

The Financial Accounting Standards Board’s long-awaited decision calls for public companies to start expensing options beginning with their first annual reporting period after June 15, 2005.

FASB Chairman Robert H. Herz said the new rules will “provide investors and other users of financial statements with more complete and unbiased financial information.”

FASB did not specify a particular method of valuing options, or the formulas companies use to assign costs to the options.

The new rules have pitted the technology industry, which relies on options to attract and retain employees, against some highly influential officials who advocate expensing options, including Federal Reserve Chairman Alan Greenspan, Securities and Exchange Commission Chairman William Donaldson, billionaire investor Warren Buffett and the Big Four accounting firms.

The SEC yesterday endorsed the move, saying it “represents another important improvement” in corporate accounting.

Stock options are perks given to employees that allow them to buy shares of their company’s stock in the future at a set price. If the stock rises before the options are exercised, the employee can buy the stock at the predetermined, lower price, then sell it at the higher, current price and pocket the difference.

Many employees of companies like Microsoft Corp. and America Online famously became millionaires in the 1990s thanks to stock options.

Under current accounting standards, a company’s cost of issuing options only needs to be disclosed in a footnote to its financial statement, not deducted from the net income it reports to investors.

The new rules will force companies to subtract the option expense from earnings, which could dramatically knock down profits at some companies.

For instance, Apple Computer Inc. said in its latest annual report that its fiscal 2004 earnings would be cut from 71 cents per share to 44 cents had it expensed its options at their fair-market value.

But the FASB’s actions are far from being set in stone considering that Congress has the power to mute its action. A bill passed through the U.S. House of Representatives last summer would require companies only to expense the options granted to their five top executives, though that piece of legislation is currently stalled in the Senate.

Still, critics of stock-option expensing aren’t backing down, keeping up their argument that deducting the option costs from earnings could allow inaccurate information to be entered into financial statements since most methods to value the options include some estimates about the future.

And many companies, particularly in the tech sector, fear the new rules will curtail a key perk that helped start-ups keep workers loyal and hardworking before the companies began turning profits.

“We need incentives that will help create jobs and foster the development of new products and services,” Bruce Hahn, director of public policy for the Computing Technology Industry Association, said yesterday.

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