Bill Limiting Options Accounting Passes House Committee

On June 15, 2004, the House Financial Services Committee passed H.H. 3574, "The Stock Options Accounting Reform Act," by a vote of 45-13. The bill would limit stock options expensing to the top five executives of a company, require an economic impact study before the new rules become effective, and exempt small business from the requirement. Specifically, the bill would amend the Securities and Exchange Act of 1934 by adding a new Section 13(m) with the following provisions:

1. Publicly traded companies would have to report an income statement expense for options granted to the top five executives using a fair value standard based on a formula such as Black-Scholes or a binomial model.
2. When options are actually exercised, companies would be required to "true up" the difference between the cost they initially estimated for the options and the actual spread on the options.
3. Volatility will automatically be set to zero for all accounting models.
4. Non-public companies with (both) less than $25 in revenue and $25 million in common stock value held by non-affiliates are exempted from the requirement, and, if they go public, will not be subject to its requirements for three years after an IPO.
5. No accounting rules on options can go into effect until a one-year study is done by the Department of Labor and Department of Commerce.
6. A fuller and plainer disclosure of options is required, including the number of options granted, the weighted average exercise price, an estimate of how many options will vest, and an expanded discussion of dilution.

Passage in the full House seems very possible, but the Senate looks very doubtful.