Washington (May 12, 2004) -- In testimony defending their controversial plan to mandate the expensing of employee stock options, top officials from the Financial Accounting Standards Board dismissed suggestions that the proposal has already had a chilling effect on small business growth.

Rather than discouraging business growth, expensing employee stock option compensation will “enhance the efficiency of capital allocation in our markets” and promote “the growth and stability of the U.S. economy,” FASB chairman Robert H. Herz told members of a House Financial Services Subcommittee.

Citing support for the FASB proposal from the Financial Economist Roundtable, the Congressional Budget Office, Federal Reserve Chairman Alan Greenspan, and a number of Nobel Prize-winning economists, Herz noted that many of those experts have concluded “that the expensing of all employee stock options would result in a more accurate and meaningful assessment by employers of the true costs and benefits of the many available forms of equity-based compensation” -- a development that could lead to “sounder and more creative compensation approaches” by American businesses.

Herz's defense of the proposal was echoed by FASB board member George Batavick, head of the board’s newly established Small Business Advisory Committee. “Our ultimate goal is to develop an accounting standard that will faithfully report the underlying economic effects of equity-based compensation transactions and, thus, significantly improve the transparency and integrity of financial reporting in the U.S.,” he told the subcommittee.

Batavick suggested that critics of the plan are exaggerating the potential effects of expensing requirements for small companies, noting that “the vast majority of small businesses in the U.S. do not grant employee stock options” in the first place.

FASB’s assurances, however, failed to sway Rep. Ed Royce, R-Calif., who chaired the subcommittee hearing. Voicing “deep concerns about the potential economic consequences” of the expensing proposal, Royce said that, “stock options have played an important and positive role in our economy.”

According to Royce, the FASB proposal has already had negative economic fallout on business development in his state and others. “Many technology firms have already announced that they will no longer issue employee options,” and “as a result, many firms have not been able to attract needed employees,” he said. “Whether an individual is risk-adverse, risk-taking, or risk-loving, he or she is not likely to leave their job with a large mature firm to go to a start-up for a compensation package containing less cash and no stock options,” he told Congress.

Royce is one of more than 100 House sponsors of legislation introduced by Rep Richard Baker, R-La., to restrict FASB’s ability to set standards for stock option compensation. Under that bill, expensing would be made mandatory only for certain senior executives, and the Securities and Exchange Commission would be prevented from recognizing the FASB rule until an economic impact study is completed.

-- Ken Rankin

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