IIB 
108TH CONGRESS 
2D SESSION 
H. R. 3574
IN THE SENATE OF THE UNITED STATES 
JULY 21, 2004
Received 
SEPTEMBER 7, 2004
Read twice and referred to the Committee on Banking, Housing, and Urban 
Affairs 
AN ACT 
To require the mandatory expensing of stock options granted 
to executive officers, and for other purposes.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
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SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Stock Option Account-
ing 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
OP-
TIONS.—
‘‘(1) NAMED EXECUTIVE OFFICER.—As used in 
this subsection, the term ‘named executive officer’ 
means—
‘‘(A) all individuals serving as the chief ex-
ecutive officer of an issuer, or acting in a simi-
lar capacity, during the most recent fiscal year, 
regardless of compensation level; and 
‘‘(B) the 4 most highly compensated execu-
tive 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 sec-
tion 12 shall show as an expense in the annual re-
port of such issuer filed under subsection (a)(2), the
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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—
‘‘(i) be equal to the value that would 
be agreed upon by a willing buyer and sell-
er of such option, who are not under any 
compulsion to buy or sell such option; and 
‘‘(ii) take into account all of the char-
acteristics 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 as-
sumed 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;
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‘‘(ii) the issuer is organized under the 
laws of the United States, Canada, or Mex-
ico; 
‘‘(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 out-
standing 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 require-
ments of this paragraph. 
‘‘(B) DELAYED EFFECTIVENESS.—The re-
quirements 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 pur-
chase the stock of an issuer granted after such 
date.
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‘‘(5) 
VOLUNTARY
EXPENSING.—Notwith-
standing the requirements of this subsection, issuers 
may elect to expense the fair value of all officer and 
employee stock options in the annual report of such 
issuer under subsection (a)(2), in accordance with 
the expensing alternative of Statement of Financial 
Accounting Standards Number 123, and any such 
issuer making such election in the annual report for 
a fiscal year shall not be subject to paragraphs (2) 
through (4) of this subsection for such fiscal year.’’.
SEC. 3. PROHIBITION ON EXPENSING AND ECONOMIC IM-
PACT STUDY. 
(a) PROHIBITION.—Section 19(b) of the Securities 
Act of 1933 (15 U.S.C. 77s(b)) is amended by adding at 
the end the following: 
‘‘(3) PROHIBITION
ON
EXPENSING
STAND-
ARDS.—
‘‘(A) IN GENERAL.—The Commission shall 
not recognize as ‘generally accepted’ any ac-
counting principle relating to the expensing of 
stock options unless—
‘‘(i) it complies with the requirements 
of subparagraph (B); and 
‘‘(ii) the economic impact study re-
quired under section 3(b) of the Stock Op-
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tion Accounting Reform Act has been com-
pleted. 
‘‘(B) REQUIREMENTS.—A standard re-
ferred to in subparagraph (A) shall require 
that—
‘‘(i) if an option to purchase the stock 
of an issuer that is subject to the require-
ments of section 13(m) of the Securities 
Exchange Act of 1934 is exercised—
‘‘(I) any expense that had been 
reported under that section 13(m) 
with respect to such option shall be 
recomputed as of the date of exercise 
and shall be equal to the difference 
between the price of the underlying 
stock and the exercise price; and 
‘‘(II) to the extent the recom-
puted 
amount 
differs 
from 
the 
amount previously reported under sec-
tion 13(m) with respect to such op-
tion, the difference shall be reported 
in the fiscal year in which the option 
is exercised as a reduction or increase, 
as the case may be, of the total ex-
pense required to be reported under
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that section 13(m) during that fiscal 
year; 
‘‘(ii) if an option to purchase the 
stock of an issuer that is subject to the re-
quirements of section 13(m) of the Securi-
ties Exchange Act of 1934 is forfeited or 
expires unexercised, any expense that had 
been reported under that section 13(m) 
with respect to such option shall be re-
ported in the fiscal year in which the op-
tion 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 
‘‘(iii) to the extent that any reduction 
required under clause (i) or (ii) 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.
‘‘(C) EXCEPTION
FOR
VOLUNTARY
EX-
PENSING.—Nothing in this paragraph or in any 
other provision of the Stock Option Accounting 
Reform Act shall prevent the Commission from 
continuing to recognize the expensing alter-
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native of Statement of Financial Accounting 
Standards Number 123 as part of generally ac-
cepted accounting principles for issuers that 
elect to expense the fair value of all officer and 
employee stock options in the annual report of 
such issuer pursuant to section 13(m)(5) of the 
Securities Exchange Act of 1934.’’. 
(b) ECONOMIC IMPACT STUDY.—Not later than 1 
year after the date of enactment of this Act, 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, includ-
ing 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 re-
search and innovation; 
(4) the effect of such plans in stimulating the 
economic growth of the United States; and
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(5) the role of such plans in strengthening the 
international competitiveness of businesses organized 
under the laws of the United States. 
SEC. 4. IMPROVED EMPLOYEE STOCK OPTION TRANS-
PARENCY AND REPORTING DISCLOSURES. 
(a) ENHANCED DISCLOSURES REQUIRED.—Not later 
than 180 days after the date of enactment of this Act, 
the Commission shall, by rule, require each issuer filing 
a periodic report under section 13(a) or 15(d) of the Secu-
rities Exchange Act of 1934 (15 U.S.C. 78m, 78o(d)) to 
include in such report more detailed information regarding 
stock option plans, stock purchase plans, and other ar-
rangements involving an employee acquisition of an equity 
interest in the company. Such information shall include—
(1) a discussion, written in ‘‘plain English’’, in 
accordance with the Plain English Handbook pub-
lished by the Office of Investor Education and As-
sistance of the Commission, of the dilutive effect of 
stock option plans, including tables or graphic illus-
trations of such dilutive effects; 
(2) expanded disclosure of the dilutive effect of 
employee stock options on the issuer’s earnings per 
share;
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(3) prominent placement and increased com-
parability and uniformity of all stock option related 
information; 
(4) the number of outstanding stock options; 
(5) the weighted average exercise price of all 
outstanding stock options; and 
(6) the estimated number of stock options out-
standing that will vest in each year. 
(b) DEFINITIONS.—As used in this section: 
(1) COMMISSION.—The term ‘‘Commission’’ 
means the Securities and Exchange Commission. 
(2) ISSUER.—The term ‘‘issuer’’ has the mean-
ing provided in section 2(a)(7) of the Sarbanes-
Oxley Act of 2002 (15 U.S.C. 7201(a)(7)). 
(3) EQUITY INTEREST.—The term ‘‘equity in-
terest’’ includes common stock, preferred stock, 
stock appreciation rights, phantom stock, and any 
other security that replicates the investment charac-
teristics of such securities, and any right or option 
to acquire any such security. 
SEC. 5. PRESERVATION OF AUTHORITY. 
Nothing in this Act shall be construed to limit the 
authority over the setting of accounting principles by any 
accounting standard setting body whose principles are rec-
ognized by the Securities and Exchange Commission
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under section 19(b)(1) of the Securities Act of 1933 (15 
U.S.C. 77s(b)(1)).
Passed the House of Representatives July 20, 2004. 
Attest: 
JEFF TRANDAHL, 
Clerk.