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Ed Frauenheim

Staff Writer, CNET

The independent body charged with setting U.S. accounting standards on Thursday gave hard deadlines for companies to treat stock options as expenses in financial statements.

The new rule, which takes effect in June, promises to have a big impact on technology companies. Tech firms have used stock options as a means to recruit and retain employees. Recognizing stock options as an expense could take a big bite out of earnings.

The Financial Accounting Standards Board issued its “Final Statement” on accounting for share-based payments after considering the matter for two years. “Recognizing the cost of share-based payments in the financial statements improves the relevance, reliability and comparability of that financial information,” according to a statement from board member Michael Crooch.

But critics blasted the board for coming up with a rule that is not workable and will harm the country’s competitiveness. “The FASB ruling will have economic consequences,” Nevada Sen. John Ensign, who serves as chairman of the Senate Republican High Tech Task Force, said in a statement. “It will impede job creation and slow economic growth. Furthermore, our best and brightest minds could move to places such as China, where the government now strongly encourages the use of stock options for business growth.”

Until now, companies have been able to account for stock options in footnotes to their financial statements. Under the board’s new rule, public companies other than those filing as small-business issuers will have to expense stock options after June 15. Public companies that file as small-business issuers will have to expense stock options after Dec. 15 next year.

The new expensing standard will not work, said Rick White, CEO of TechNet and chairman of the International Employee Stock Options Coalition, a group of trade associations and companies that support broad-based employee stock option plans.

The valuation models FASB has now mandated “are so confusing and open to interpretation that they are not even auditable,” White said in a statement. “We urge Congress, the SEC and the administration to maintain their vigilance on this issue and take the steps necessary to ensure that financial statements are accurate and reliable, that economic growth and job creation are not impeded, and that broad-based stock option plans are preserved and expanded.”

The U.S. House of Representatives in July voted overwhelmingly to largely preserve the old method of accounting for the cost of stock options. But the Senate hasn’t followed suit.

At least one senator hopes Congress will let the new rule stand. “The issuance of FASB’s new rule marks a victory in the decade-long battle to reform an egregious accounting practice that contributed to the worst corporate accounting scandals in our nation’s history,” Illinois Sen. Peter Fitzgerald said in a statement Thursday. “In the aftermath of Enron, WorldCom, Global Crossing, Tyco, Adelphia and other corporate scandals, Congress should be trying to ensure that corporate earnings reports are more, not less, reliable.”