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SEC Will Provide Accounting Guidance

New Rules on Stock Options to Take Effect

By Carrie Johnson
Washington Post Staff Writer
Thursday, March 10, 2005; Page E03

Securities and Exchange Commission Chairman William H. Donaldson told lawmakers yesterday that the agency would issue guidance this month to help companies comply with new rules on accounting for stock options.

Options allow employees to purchase stock at a specific price within a set time frame. Companies, particularly those in the technology industry, made wide use of options in the 1990s as a recruitment and retention tool. But critics argued that options were doled out too prolifically, leading to dramatic increases in executive pay, in part because they were a form of compensation for which companies had to record no expenses.

Securities and Exchange Commission Chairman William H. Donaldson addresses the Senate Banking Committee. (Ken Cedeno -- Bloomberg News)

The Financial Accounting Standards Board, an accounting standards group, will require companies to treat options as an expense on balance sheets starting in the third quarter. The board said it will allow companies to choose among several models to value the options. That latitude is producing confusion, Sens. Wayne Allard (R-Colo.) and Robert F. Bennett (R-Utah) complained yesterday at a Senate Banking Committee hearing.

Some trade groups say they also fear that companies may sued by shareholders based on the valuation model they select and the disclosures they make. They also have pushed lawmakers to pass a bill derailing the options rule, a move that has not gained much momentum so far this year.

"You, sir, are the last gatekeeper against this kind of insanity," Bennett told Donaldson yesterday. "I'm pleading with you and your accountants to find some way through this thicket."

"This is a very complex subject," Donaldson responded. "We hope to be in a position to give guidance so people can deal with this."

Donaldson assured lawmakers that if companies use an approved model and properly disclose their estimates and assumptions, "the chances of, certainly, litigation coming from us is zero."

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