Stock Options Accounting Legislation Clears House Subcommittee

On Wednesday, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, chaired by Rep. Richard H. Baker (LA), approved legislation that would preserve broad-based employee stock option plans and improve American competitiveness.

H.R. 3574, the Stock Option Accounting Reform Act, introduced by Rep. Baker on Nov. 21, was agreed to by a voice vote with two amendments. The legislation, which has been the subject of several hearings held by the Subcommittee, would require companies to report employee stock options granted to chief executives and the next four highest paid officers. In addition, small businesses would be exempt from expensing options, and newly public companies would be able to delay expensing for top executives in the first three years.

Offered by many companies as employee incentives and compensation, stock options allow employees to purchase company shares at a specified price within a certain time. Employees profit if the company share price rises and they choose to exercise their options.

"Today’s strong bipartisan vote is a clear first victory for finding an approach to this issue that doesn’t throw the baby out with the bathwater,” Baker said. “The real lesson of Enron, WorldCom, and Freddie Mac was not solely an accounting issue and the manipulation of numbers, but also a corporate governance issue and the executive compensation incentives behind the manipulations. Momentum is now building for common sense insistence on sound corporate management, coupled with protecting millions of rank-and-file American workers.”

The Subcommittee approved by voice vote a manager’s amendment, introduced by Rep. Baker, intended to make minor technical corrections to the legislation.

An amendment offered by Rep. Brad Sherman (CA) and approved by voice vote would add Mexico to the provision that exempts small businesses as defined currently by the SEC pursuant to Regulation S-B.

Under current Financial Accounting Standards Board rules, companies can either recognize the value of employee stock options as an expense or provide relevant and detailed disclosure about those options in the footnotes to financial statements.

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