Expensing Limitation Bill's March Through Congress Slowed

July 8, 2004 (PLANSPONSOR.com) - The US House of Representatives Energy and Commerce Committee has staked its claim to joint jurisdiction over a bill in Congress to limit the impact of mandatory stock option expensing, slowing the legislation's march through Congress.

>The bill had been scheduled to go to the House floor later this week but a delay is now possible, a House Republican leadership aide told Reuters.  An Energy and Commerce subcommittee scheduled a hearing for Thursday on the stock option expensing proposals by the rulemaking Financial Accounting Standards Board (FASB).

>Scheduled to testify before the Energy and Commerce committee are FASB chairman Robert Herz , David Walker, head of the General Accounting Office (GAO), and Rick White, chairman of theInternational Employee Stock Options Coalition (IESOC) .  “The witnesses are high level and should be heard in a public way,” said Larry Neal, spokesman for the Energy and Commerce Committee.

Under FASB’s Exposure Draft issued on March 31, all forms of share-based payments to employees would be treated the same as other forms of compensation by recognizing the related cost in the income statement. The expense of the award generally would be measured at fair value at the grant date (See  The Bottom Line: Expensing Proposition ).  To arrive at this cost, FASB provided several valuation techniques in the Exposure Draft, including a lattice model (an example of which is a binomial model) and a closed-form model (an example of which is the Black-Scholes-Merton formula) that would meet the criteria for estimating the fair values of employee share options.

Earlier this month, the House Financial Services Committee approved the bill to delay implementing any standard for a year, until completion of an economic impact study by the federal departments of Labor and Commerce.  The bill would also restrict any option-expensing standard from FASB to options granted to the top five officers of a company (See FASB Options Expensing Limit Bill Gets Committee OK ).

>The bill’s sponsor, Representative Richard Baker (R-Louisiana), said the measure was aimed at protecting broad-based stock option plans that start-up companies often use to attract workers.   But opponents contend federal lawmakers need to stay out of setting accounting standards, especially just two years after voting to increase FASB’s independence in the Sarbanes-Oxley Act crackdown on corporate corruption.

The bill appears to have the inside track for House approval, with over 100 co-sponsors.   Regardless of the legislation’s fate in the House, it faces a decidedly uphill battle in the Senate.  Republican Senator Richard Shelby, who chairs the Banking Committee, said earlier this month that FASB should be unshackled in its ability to determine accounting standards free of political interference from Congress.