A bill to require the mandatory expensing of stock options granted to executive officers, and for other purposes.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Stock Option Accounting Reform 
Act''.

SEC. 2. MANDATORY EXPENSING OF STOCK OPTIONS HELD BY HIGHLY COMPENSATED 
              OFFICERS.

    Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) 
is amended by adding at the end the following:
    ``(m) Mandatory Expensing of Stock Options.--
            ``(1) Named executive officer.--As used in this subsection, 
        the term `named executive officer' means--
                    ``(A) all individuals serving as the chief 
                executive officer of an issuer, or acting in a similar 
                capacity, during the most recent fiscal year, 
                regardless of compensation level; and
                    ``(B) the 4 most highly compensated executive 
                officers, other than an individual identified under 
                subparagraph (A), that were serving as executive 
                officers of an issuer at the end of the most recent 
                fiscal year.
            ``(2) In general.--Subject to paragraph (4), every issuer 
        of a security registered pursuant to section 12 shall show as 
        an expense in the annual report of such issuer filed under 
        subsection (a)(2), the fair value of all options to purchase 
        the stock of the issuer granted after December 31, 2004, to a 
        named executive officer of the issuer.
            ``(3) Fair value.--
                    ``(A) In general.--The fair value of an option to 
                purchase the stock of the issuer that is subject to 
                paragraph (2) shall be--
                            ``(i) equal to the value that would be 
                        agreed upon by a willing buyer and seller of 
                        such option, who are not under any compulsion 
                        to buy or sell such option; and
                            ``(ii) shall take into account all of the 
                        characteristics and restrictions imposed upon 
                        the option.
                    ``(B) Pricing model.--To the extent that an option 
                pricing model, such as the Black-Scholes method or a 
                binomial model, is used to determine the fair value of 
                an option, the assumed volatility of the underlying 
                stock shall be zero.
            ``(4) Exemptions.--
                    ``(A) Small business issuers.--This subsection 
                shall not apply to an issuer, if--
                            ``(i) the issuer has annual revenues of 
                        less than $25,000,000;
                            ``(ii) the issuer is organized under the 
                        laws of the United States or Canada;
                            ``(iii) the issuer is not an investment 
                        company (as such term is defined under section 
                        3 of the Investment Company Act of 1940 (15 
                        U.S.C. 80a-3));
                            ``(iv) the aggregate value of the 
                        outstanding voting and non-voting common equity 
                        securities of the issuer held by non-affiliated 
                        parties is less than $25,000,000; and
                            ``(v) in the case of an issuer that meets 
                        the criteria in clauses (i) through (iv) and is 
                        a majority owned subsidiary, the parent of the 
                        issuer meets the requirements of this 
                        paragraph.
                    ``(B) Delayed effectiveness.--The requirements of 
                this subsection shall not apply to an issuer before the 
                end of the 3-year period beginning on the date of the 
                completion of the initial public offering of the 
                securities of the issuer, and shall only apply to an 
                option to purchase the stock of an issuer granted after 
                such date.''.

SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IMPACT STUDY.

    (a) Prohibition.--Section 19(b) of the Securities Act of 1933 is 
amended by adding at the end the following:
            ``(3) Prohibition on expensing standards.--
                    ``(A) In general.--The Commission shall not 
                recognize as ``generally accepted'' any accounting 
                principle established by a standard setting body 
                relating to the expensing of stock options unless--
                            ``(i) it complies with the requirements of 
                        subparagraph (B); and
                            ``(ii) the economic impact study required 
                        under section 3(b) of the Stock Option 
                        Accounting Reform Act of 2003 has been 
                        completed.
                    ``(B) Requirements.--A standard referred to in 
                subparagraph (A) shall require that--
                            ``(i) if an option to purchase the stock of 
                        an issuer that is subject to the requirements 
                        of section 13(m) of the Securities Exchange Act 
                        of 1934 is exercised, forfeited, or expires 
                        unexercised, any expense that had been reported 
                        under that section 13(m) with respect to such 
                        option shall be reported in the fiscal year in 
                        which the option expires or is forfeited as a 
                        reduction of the total expense required to be 
                        reported under that section 13(m) during that 
                        fiscal year; and
                            ``(ii) to the extent that any reduction 
                        required under clause (i) exceeds total option 
                        expenses for any fiscal year, such excess shall 
                        be reported as income with respect to options 
                        to purchase the stock of the issuer.''.
    (b) Economic Impact Study.--The Secretary of Commerce and the 
Secretary of Labor shall conduct and complete a joint study on the 
economic impact of the mandatory expensing of all employee stock 
options, including the impact upon--
            (1) the use of broad-based stock option plans in expanding 
        employee corporate ownership to workers at a wide range of 
        income levels, with particular focus upon non-executive 
        employees;
            (2) the role of such plans in the recruitment and retention 
        of skilled workers;
            (3) the role of such plans in stimulating research and 
        innovation;
            (4) the effect of such plans in stimulating the economic 
        growth of the United States; and
            (5) the role of such plans in strengthening the 
        international competitiveness of businesses organized under the 
        laws of the United States.

Summary: Stock Option Accounting Reform Act - Amends the Securities Exchange Act of 1934 to require an issuer of registered securities to show as an expense in its mandatory annual report the fair value of all stock purchase options granted to certain of its senior executive officers after December 31, 2004. Exempts small business issuers from such requirement. Amends the Securities Act of 1933 to require reporting of: (1) stock option expenses as a reduction of the total expense in the fiscal year in which they expire or are forfeited. And (2) as income any excess by which such reduction exceeds total option expenses for any fiscal year. Requires any accounting principle recognized as generally accepted by the Securities and Exchange Commission (SEC) regarding the expensing of stock purchase options to comply with this Act. Denies recognition to any such accounting principle until the Secretaries of Commerce and of Labor complete a joint study on the economic impact of mandatory expensing of all employee stock options.