May 2004--A proposal introduced by the Financial Accounting Standards Board (FASB) on March 31 has met with a great deal of opposition, particularly from the small business sector. The proposal to require that companies deduct the value of employee stock options from their profits has sparked national debate.

Opponents of the new rules feel the mandatory expensing of options will harm small businesses, especially start-ups.

"The FASB's proposal reflects a blatant disregard for the challenges that small businesses will face in attempts to comply with this proposed standard," said Mark Heesen, President of the National Venture Capital Association (NVCA), said in a recent press release.

A key issue to entrepreneurs is that companies may have a harder time raising capital if the expensing of stock options is included in their financial statements.

Some opponents also argue that current, complex valuation models for employee stock options are inaccurate. They insist the models are designed to value freely tradable options, not employee stock options, and that valuing options is difficult at private, emerging growth companies without benchmarks or stock performance history.

But supporters of the proposal say that the current rules, which allow companies to mention stock options without counting them as expenses and deducting them from profits, are not acceptable. Federal Reserve Board chairman Alan Greenspan, a supporter of the FASB proposal, told Reuters earlier this month that he feels that not expensing employee stock options can distort views of a company's profitability.

Bills have been introduced in both the House and Senate to overturn the new accounting rules. One, introduced by Sen. Mike Enzi, R-Wyo., would only require a company to book the stock options of its top five executives and would exempt start-ups from expensing employee stock options for their first three years of operations. But it remains to be seen whether legislation aiming to overturn the new accounting rules will prevail.

"I don't think there is any way to stop FASB. They are hell-bent on going forward," said Enzi at a recent Capitol Hill forum on technology and innovation.

A similar proposal by the FASB to expense options was defeated in Congress in 1994, when the Senate voted 88-9 that the FASB should continue the current accounting treatment of employee stock.

The FASB, which is not expected to finalize the new rule until the fourth quarter, is still accepting comments on it-the comment period will end on June 30.