Washington (June 17, 2004) -- In a 45-13 vote, the House Financial Services Committee advanced legislation that would require companies to report as an expense only employee stock options granted to a company’s chief executive and its next four highest paid employees.

Under the bill, known as the Stock Option Accounting Reform Act and sponsored by Rep. Richard H. Baker, R-La., small businesses would be exempt from expensing options and newly public companies would be able to delay expensing in the first three years.

The legislation would thwart the Financial Accounting Standards Board's controversial proposal to require companies to expense options along with all forms of share-based compensation. The FASB exposure draft, issued in March, has created a firestorm of controversy. Critics of the plan contend that it could have a negative impact on the economy, and that there hasn't been sufficient guidance on valuation models.

"My major criticism of the Baker bill would be that it creates inconsistency. If there's good reasoning for expensing, then it should apply to all employees," said Cindy Ma, an economist with NERA and a member of FASB’s Options Valuation Group. "If there's no good reason to expense, then you shouldn't do it. You cannot separate it into two groups. I cannot understand the economic rationale for doing it this way."

"The bill also requires that we wait a year to do another study on the impact of options expensing," Ma added. "The cost benefit may not justify such a study. This issue has been debated for so many years. My skepticism is, what other things are you going to uncover that haven't already been uncovered by the abundant amount of literature available? It seems to me like a delaying tactic."

The comment period for the FASB exposure draft ends June 30. The Securities and Exchange Commission would have to approve the final standard.

The FASB backed down on a similar proposal nearly a decade ago after Congress intervened.

The House bill also included an amendment that would set a one-year deadline for the completion of an economic impact study mandated in the legislation. The bill now moves on to a full House vote.

-- Melissa Klein Aguilar

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