Debating stock options deductions. (Investments & Finance).

The good news is that accounting rule-makers are moving toward a rule that would force all companies to deduct complex costs for stock options from their profits. The other week Ernst & Young LLP, the fourth-largest accounting firm, broke ranks and dropped its opposition to the deduction.

The bad news is that more than 150 companies already expense, or deduct this cost, So, that makes it difficult if not impossible to compare the results of similar companies in the same industry that don't deduct these costs from earnings.

The tough and thorny problems in requiring all companies to expense stock option expenses were aptly shown in a recent roundtable at Baruch College's Center for Financial Integrity.

The problems include:

* How to measure such costs prior to the options being exercised by the recipient.

* The need for the U.S. to wait until European countries act on the matter late this year or in 2004 so there can be worldwide agreement on such rules.

* The dread among many neophyte as well as software and computer companies that insist they need options to attract staff talent and remain competitive with major firms but that the added expense would scuttle them.

Under current rules of the Financial Accounting Standards Board (FASB), the chief rule-making body for accountants, companies must report their option expenses annually as a footnote but not in the profit and loss statement. Also, such expenses aren't included in earnings releases, so the public must peruse the company's 10K reports, which unsophisticated investors rarely do.

Most companies that voluntarily deduct stock option expenses from profits -- such as General Electric, Coca-Cola and Proeter & Gamble -- aren't software and computer companies with a lot of options outstanding, so the impact on their earnings is slight.

But a table issued by Bear Stearns shows that annual operating profits in 2001 would drop 13,421 percent for Cisco Systems Inc. if the rule was applied. For Nextel Communications Inc., they would drop 2,699 percent.

In the mid-1990s, the FASB tried to move forward on the issue but pressure from Congress and key parts of industry forced the rule-making body to confine the measurement to a footnote -- a move that many adamant stock market analysts considered surrender.

Since then, accounting scandals at Enron Corp., Tyco International Ltd. and WorldCom Inc. have forced rule makers to take another look at expensing stock options, but opposition in industry remains strong. FASB has just asked for comment on a proposal being considered by the International Accounting Standards Board in London.

Walter Cadette, retired vice president at J. P. Morgan & Co., maintained that the reason for expensing options is the big shift in wealth "from the shareholder to management."

But Hardwick Simmons, chairman and chief executive of Nasdaq Stock Market Inc., maintained that giving away stock options "doesn't cost those companies a dime" since holders pay for the stock when the option is exercised. But expensing options, or deducting their so-called cost, from profits "would preclude those companies from the labor pool of the U.S."

James Leisenring, former vice chairman of FASB who serves as a liaison with the IASB in London, countered opponents of expensing options by saying that disclosure in footnotes is "no substitute for recognition and measurement of assets and liabilities."