108TH CONGRESS
2D SESSION
H. R. 3574
AN ACT
To require the mandatory expensing of stock op-
tions granted to executive officers, and for other
purposes.
108TH CONGRESS
2D SESSION
H. R. 3574
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,
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
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;
‘‘(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.
‘‘(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-
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
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-
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
(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;
(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
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:
Clerk.