FASB Considers Costs to Small Businesses in Stock Option Issue

When final rules are adopted requiring expensing of stock options, small businesses may get different treatment than big corporations, according to the chair of the Financial Accounting Standards Board.

At a congressional hearing Tuesday, FASB Chairman Robert Herz defended the board's March recommendation for mandatory expensing, but noted that the board is concerned about a "cost-effective" approach to small businesses. He said FASB has developed some provisions to address the cost issue.

"I am very interested in the subject, because the cost of any new accounting standard can fall disproportionately on small businesses, so we have to be very careful," Herz told Reuters after the hearing.

But George Batavick, chairman of FASB's Small Business Advisory Committee, testified that about 95 percent of small businesses do not grant employee stock options. He added that no federal law requires nonpublic enterprises to use FASB standards.

The board has recommended that the cost of stock options — the right to buy or sell stock for a set price at a future date — should be deducted from profit in corporate income statements. Members of Congress and technology firms are in opposition, saying stock options can lure young talent at start-ups that don’t have the money to pay employees up front. Critics of stock options say they have served as a temptation for corporate executives to use accounting tricks to inflate stock prices.

FASB has asked for comments by the end of June and is expected to issue any final options standard by year's end.

Meanwhile, as Congress threatens to block FASB’s plan, Securities and Exchange Commission Chairman William Donaldson sent a letter to a group of House lawmakers urging them to leave the issue alone.

He said the Sarbanes-Oxley Act of 2002 reaffirms the independence of FASB. "I believe that the process established by the FASB to consider the pending stock option proposal should be allowed to run its course," Donaldson wrote.

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