“Addressing a concern of many investors, the Financial Accounting Standards Board proposed yesterday that companies be required to report as an expense the value of the stock options they give to employees and executives,” writes Floyd Norris in today’s New York Times.

“Unless overturned by Congress, the board’s proposal will lead many companies to report lower profits than they showed before, when few companies chose to treat the value of options as an expense. Whether that will affect stock prices, as many companies have feared, remains to be seen.”

” ‘This is an area of great concern to many investors,’ said Robert Herz, the chairman of the accounting board. ‘Having looked at it pretty comprehensively, we believe the accounting can and should be improved.’ “

“Many companies, especially in high-technology businesses, say that options are an important tool to attract talent to new ventures and that stifling them will also damp innovation and economic growth. They have mounted a lobbying campaign to persuade Congress to block the proposal. Political pressure led the accounting board to abandon a similar effort 10 years ago.”

“After that effort failed, companies issued options at a rapid pace during the stock market boom as a reward to valued employees. When the market collapsed, a period of corporate scandals followed, leading many investors to conclude that more diligent accounting practices were needed.”

“David Zion, an accounting analyst at Credit Suisse First Boston, estimated that 2003 earnings of companies in the Standard & Poor’s 500 would have been 8 percent lower had the companies been forced to treat options as an expense. He noted that that impact was smaller than it would have been in earlier years, in part because profits were higher and in part because companies have begun cutting back on option grants in expectation of the new rule, which would take effect in 2005.”

“In the last few years, more than 100 of the 500 companies in the S.& P. index have begun to expense options, which is now allowed voluntarily. A study released yesterday by Towers Perrin, a consulting firm, found share prices of companies that chose to expense options did no better or worse than those of other companies in following months.”

“But the impact on some companies’ earnings will be great. Pat McConnell, an accounting analyst at Bear Stearns, said the operating earnings of the 100 largest companies traded on the Nasdaq stock market, few of which now expense option costs, would have been 44 percent lower in 2003.”

“While the board might change some details after waiting for 90 days for public comments, it is highly unlikely that it will change very much because the proposal has had years of consideration.”

“The rule is likely to lead to modifications in the way options are structured. Companies may issue options that pay only if the stock price rises substantially or does better than an index of other stocks. Some companies might decide to issue options that can be cashed in only if a particular division of a company does well.”