House passes Baker bill

by Bill Carlino

Washington — With an ominous backdrop of politics seeping into accounting standards, lawmakers last month sided with many of the top tech companies and special interest groups by passing a bill that mutes the requirements for expensing stock options.

By a 312-111 margin, the House of Representatives adopted H.R. 3574, the Stock Option Reform Act, which has been embraced by many of the country’s tech giants, such as Cisco Systems and Intel, as well as by such influential groups as the International Employee Stock Options Coalition.

The measure, introduced by Rep. Richard Baker, R-La., would require companies to only expense the options given to their top five executives beginning in 2005. It also would delay implementing any rule  related to options expensing until an economic impact study is completed. It exempts issuers with annual revenues of less than $25 million, and allows newly public companies to delay expensing for three years from the date they go public.

The Baker bill is a somewhat diluted version of an earlier proposal by the Financial Accounting Standards Board, which mandated that options given to any employee, regardless of rank, be treated as an expense. As part of the measure, Norwalk, Conn.-based FASB proposed the expensing of options for public companies starting in 2005.

The new bill does allow companies to treat all options as an expense, if they want to. Currently, about 750 companies voluntarily expense options.

“It’s rational reform, headed in the right direction,” said Baker, who also chairs the House Capital Markets Subcommittee.

“Two years ago, this vote would have been unimaginable,” said Lynn Turner, managing director at proxy researcher Glass Lewis & Co. and former chief accountant at the Securities and Exchange Commission. “Sarbanes-Oxley was being passed at the time. It’s amazing what two years, a lot of money and an election year will do. It also goes to show that the special interests have prevailed over the investing public.”

However, proponents still face the step of trying to move the bill through the Senate, where it has been staunchly opposed by Sen. Richard C. Shelby, R-Ala., chairman of the Senate Banking Committee. After the vote, he said he remained “firmly convinced that Congress should not intervene in the FASB rule-making process.”

Also, a  bipartisan group of senators, including Peter Fitzgerald, R-Ill., John McCain, R-Ariz., and Carl Levin, D-Mich., introduced a resolution to “protect the independence and integrity of an important accounting board under assault by some members of Congress.”

Others, such as Federal Reserve Chairman Alan Greenspan and Securities and Exchange Commission Chairman William Donaldson, have also expressed opposition to the bill.

“For well over 10 years, we have advocated that stock options  be expensed at fair value, it’s that simple,” said Rebecca McEnally, Ph.D., CFA and vice president of advocacy at the 70,000-member CFA Institute in Charlottesville, Va.

Turner said that, while it’s improbable that the bill will pass in the Senate, there’s a chance that it could be part of a rider as a result of a meeting between the two houses.

Rep. Michael Oxley, R-Ohio, co-author of the Sarbanes-Oxley corporate reform act and chairman of the House Financial Services Committee, said that the measure would “help preserve broad-based employee stock options and, at the same time, addresses the corporate governance concerns voiced by advocates of expensing.”

Roughly 10 years ago, FASB tried to issue a similar standard on options expensing, but it met with severe resistance from many of the then-Big Six firms and various lobbying groups.

Currently, companies are not required to expense options but have to list the value of options in financial footnotes.

Proponents of options expensing claim that options, like salaries, are compensation and should be recorded as such in the books.

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