IB 
Union Calendar No. 367 
108TH CONGRESS 
2D SESSION 
H. R. 3574 
[Report No. 108–609, Part I] 
To require the mandatory expensing of stock options granted to executive 
officers, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
NOVEMBER 21, 2003 
Mr. BAKER (for himself, Ms. ESHOO, Mr. DREIER, Mr. KENNEDY of Min-
nesota, Mr. HONDA, Mrs. TAUSCHER, Ms. LOFGREN, and Mr. CANTOR) 
introduced the following bill; which was referred to the Committee on Fi-
nancial Services 
JULY 15, 2004 
Reported with an amendment and referred to the Committee on Energy and 
Commerce for a period ending not later than July 16, 2004, for consider-
ation of such provisions of the bill and amendment as fall within the ju-
risdiction of that committee pursuant to clause 1(f), rule X 
[Strike out all after the enacting clause and insert the part printed in italic] 
JULY 16, 2004 
Additional sponsors: Mr. BURR, Mr. HAYWORTH, Mr. JOHN, Mr. BRADY of 
Texas, Mr. SHADEGG, Ms. HOOLEY of Oregon, Mr. BLUMENAUER, Mr. 
INSLEE, Mr. MCGOVERN, Mr. HOUGHTON, Mr. DOOLITTLE, Mr. DOOLEY 
of California, Mr. CROWLEY, Mr. CARTER, Mr. SOUDER, Mr. MCINTYRE, 
Mr. CAPUANO, Mr. FLAKE, Mr. SMITH of Texas, Mr. MOORE, Mr. DAVIS 
of Tennessee, Mr. BOUCHER, Mrs. BIGGERT, Mr. SESSIONS, Mr. 
HINOJOSA, Mr. DAVIS of Alabama, Mr. GONZALEZ, Mr. TOM DAVIS of 
Virginia, Mr. HEFLEY, Mr. PUTNAM, Mr. THOMPSON of California, Mr. 
ROSS, Mr. GOODLATTE, Mr. PEARCE, Mr. ENGLISH, Ms. HARMAN, Mr. 
BACHUS, Mr. HERGER, Mr. GRIJALVA, Ms. HARRIS, Mr. BLUNT, Mr. 
MENENDEZ, Ms. PELOSI, Mr. ROYCE, Mr. CARSON of Oklahoma, Mr. 
MEEKS of New York, Mr. SCOTT of Georgia, Mr. OTTER, Mr. ISAKSON, 
Mr. REYNOLDS, Mr. WU, Mr. CRANE, Mr. ISRAEL, Mr. RYUN of Kansas, 
Mr. ISSA, Ms. GINNY BROWN-WAITE of Florida, Ms. MCCARTHY of Mis-
souri, Mr. MEEHAN, Mr. FARR, Mr. KIND, Mr. CUNNINGHAM, Mr.
MATHESON, Ms. LORETTA SANCHEZ of California, Mr. GARY G. MILLER 
of California, Mr. MORAN of Virginia, Mr. MCINNIS, Mr. FILNER, Mr. 
THORNBERRY, Mr. CARDOZA, Mr. SMITH of Washington, Mr. WALDEN 
of Oregon, Mr. TANCREDO, Mr. MILLER of North Carolina, Mr. GEP-
HARDT, Mr. SANDLIN, Mr. VITTER, Mr. BONILLA, Mr. FOSSELLA, Mr. 
WELLER, Mr. FEENEY, Mr. TURNER of Texas, Mr. OSE, Ms. HART, Mr. 
BOEHNER, Mr. GARRETT of New Jersey, Mr. SENSENBRENNER, Mr. 
COOPER, Mrs. MUSGRAVE, Mr. BELL, Mr. BOEHLERT, Mr. DICKS, Mr. 
HENSARLING, Mr. CANNON, Mr. COX, Mrs. WILSON of New Mexico, Mr. 
MANZULLO, Ms. CARSON of Indiana, Mr. LANTOS, Mr. JONES of North 
Carolina, Mr. GREEN of Texas, Mr. CASE, Mr. SCHIFF, Mr. POMBO, Mr. 
ROGERS of Michigan, Mr. NUNES, Mr. NETHERCUTT, Mr. PRICE of 
North Carolina, Ms. MCCOLLUM, Mr. HALL, Mr. FRANKS of Arizona, 
Mr. CHANDLER, Mr. CRAMER, Mr. FOLEY, Mr. BILIRAKIS, Mr. WILSON 
of South Carolina, Mr. EHLERS, Ms. DUNN, Ms. JACKSON-LEE of Texas, 
Ms. GRANGER, Mrs. BLACKBURN, Mr. SULLIVAN, Mr. SIMPSON, Mr. 
KENNEDY of Rhode Island, and Mr. HOEKSTRA 
JULY 16, 2004 
The Committee on Energy and Commerce discharged; committed to the Com-
mittee of the Whole House on the State of the Union and ordered to be 
printed 
[For text of introduced bill, see copy of bill as introduced on November 21, 2003] 
A BILL 
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, 
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 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 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 execu-
tive 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 seller 
of such option, who are not under any com-
pulsion 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 sub-
section 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, Canada, or Mex-
ico; 
‘‘(iii) the issuer is not an investment 
company (as such term is defined under sec-
tion 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 eq-
uity securities of the issuer held by non-af-
filiated 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 re-
quirements of this subsection shall not apply to 
an issuer before the end of the 3-year period be-
ginning on the date of the completion of the ini-
tial 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 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 STANDARDS.— 
‘‘(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-
tion Accounting Reform Act has been com-
pleted. 
‘‘(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 require-
ments of section 13(m) of the Securities Ex-
change Act of 1934 is exercised— 
‘‘(I) any expense that had been re-
ported under that section 13(m) with 
respect to such option shall be recom-
puted 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 recomputed 
amount differs from the amount pre-
viously reported under section 13(m) 
with respect to such option, the dif-
ference 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 expense required to 
be reported under that section 13(m) 
during that fiscal year; 
‘‘(ii) if an option to purchase the stock 
of an issuer that is subject to the require-
ments of section 13(m) of the Securities Ex-
change Act of 1934 is forfeited or expires 
unexercised, any expense that had been re-
ported under that section 13(m) with re-
spect 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 
‘‘(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.’’. 
(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 man-
datory 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. 
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 peri-
odic report under section 13(a) or 15(d) of the Securities 
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 arrangements 
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 Assist-
ance of the Commission, of the dilutive effect of stock 
option plans, including tables or graphic illustrations 
of such dilutive effects; 
(2) expanded disclosure of the dilutive effect of 
employee stock options on the issuer’s earnings per 
share; 
(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 out-
standing 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 meaning 
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 inter-
est’’ includes common stock, preferred stock, stock ap-
preciation rights, phantom stock, and any other secu-
rity that replicates the investment characteristics 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 au-
thority over the setting of accounting principles by any ac-
counting standard setting body whose principles are recog-
nized by the Securities and Exchange Commission under 
section 19(b)(1) of the Securities Act of 1933 (15 U.S.C. 
77s(b)(1)).
Union Calendar No. 367 
108TH CONGRESS 
2D SESSION 
H. R. 3574 
[Report No. 108–609, Part I] 
A BILL 
To require the mandatory expensing of stock op-
tions granted to executive officers, and for other 
purposes. 
JULY 16, 2004 
The Committee on Energy and Commerce discharged; 
committed to the Committee of the Whole House on 
the State of the Union and ordered to be printed 
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