Technology firms face challenge of option expensing.

Armageddon in the form of stock option expensing is fast-approaching for area tech companies.

At least that's how many of these businesses view the rules that require public companies to count stock options as expenses on earnings reports after June 15.

The rules, set by the Financial Accounting Standards Board, stand to have big consequences for public companies.

Irvine computer maker Gateway Inc. reported in its most recent filing that stock option expensing will "affect our future earnings per share and could limit Gateway's willingness to use equity-based compensation plans, which could affect our ability to attract and retain employees."

Technology companies are among the biggest users of options, which they offer to lure software developers, computer scientists and other sought-after workers.

Investor groups have been among the biggest backers of the option expensing rules. They argue that options dilute earnings per share, a common gauge of a company's health, and should be accounted for clearly.

Stock options give employees the right to buy company shares at a future date based on a set price. If the stock price rises, then employees who choose to "exercise" and then sell their options make the difference between the set price and the price on the trade date. Once the options are exercised, they increase the pool of shares in the market, lowering earnings per share.

"The timing of these requirements is creating a real time crunch," said Doug Farry, executive director of industry group TechNet Southern California. "Companies have had to devote greater internal resources within their internal accounting departments to comply with the new regulations."

The latest action in the several-year process toward options expensing came after the Securities and Exchange Commission issued guidelines on how to value stock options. Detractors of the new rules long have argued that there isn't a fair way to value options.

In its guidelines, the SEC noted that valuing options requires "considerable judgment" on the part of companies and requires heavy use of historical data as a baseline for valuation. The SEC said that it would allow "reasonable" fair value estimates made in good faith.

Under the current system, companies are allowed to account for the potential impact of stock options in the footnotes of their financial statements.

Supporters for expensing say that since options have value to employees, they should be accounted for on an income statement.

The rule has drawn support of a number of industry sectors with the notable exception of tech companies, which say that stock options accounting would cause expenses to be overstated.

In early March, Irvine-based chipmaker Broadcom Corp. said it would have had to expense about $677 million in stock options for 2004. That would have turned its $218.7 million profit into a loss of $383 million.

"There's so much emotion around this issue that started with the Enron collapse," said Bill Ruehle, Broadcom's chief financial officer. "You have one side that says 'options are evil' and then the other side that says 'if you make us expense it, the economy will collapse.'"

ANDREW SIMONS 

Orange County Business Journal