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Amazon to expense options

The online retailer is one of the first tech companies to announce a switch, to start next year. Will other tech companies follow suit?

Amazon will start accounting for stock options as a regular expense on future earnings reports, Chief Executive Jeff Bezos said Tuesday.

Amazon is one of the first tech companies to announce a switch, which it will make at the beginning of next year.

The e-tail giant is making the change in part because it will allow the company more flexibility in how it compensates workers, Bezos said in Amazon's earnings conference call. And despite the adjustment, the Net retailer will continue to offer options and other stock-based compensation to its employees, he said.

"Employee ownership is one of the founding tenets of Amazon.com," Bezos said. "We have a broad commitment to employee ownership, and that commitment won't change."

Amid the accounting scandals at WorldCom, Enron and other companies, corporate watchdogs have increasingly focused in recent months on the accounting treatment of options. Current accounting rules allow companies to exclude the expense of stock options from their quarterly reports. Critics have charged that such exclusions distort companies' earnings and have encouraged the aggressive--and possibly illegal--accounting methods behind the recent scandals.

Responding to such criticisms, companies such as Coca-Cola, Bank One and the Washington Post Co. have announced in recent weeks that they plan to expense options in future earnings statements.

But the technology industry has historically opposed such changes, as many companies have been lavish with option grants. Having to report such grants as an expense could significantly affect a company's bottom line.

Siebel Systems, for instance, would have reported a loss of $467 million, or $1.02 per share, last year instead of a profit of $255 million, or 49 cent per share, if it had had to record stock options as an expense, Siebel said in its annual report. Amazon, meanwhile, said in its annual report that it would have seen its loss for last year bulge from $567 million, or $1.56 per share, to $963 million, or $2.64 per share, if it had to expense option costs.

Technology companies have argued that expensing options is a distortion in and of itself, as such losses don't affect a company's cash position. In fact, the sale of options often adds to a company's cash pot, as a company receives money up to the strike price for such options from holders. Also, companies get to write off the cost of options as a business expense when it comes to taxes.

Lobbyists for the technology industry have argued that if companies are forced to expense options, they will inevitably decrease or eliminate options grants to rank-and-file employees. Such a move would affect companies' ability to attract talented workers and would eliminate workers' sense of ownership in the company, lobbyists have argued.

But Amazon said that by expensing options it will be able to consider other types of stock compensation, Bezos said. Amazon will consider handing out restricted stock grants to employees and might grant options with a stock price set at an average of the company's price over a period of time rather than at a price on a given day. Both types of grants have to be expensed under current rules, he said.

"This opens the door for other (compensation) options," he said.

For the quarter ended June 30, Amazon lost $93.6 million on $805.6 million in revenue. The company did not estimate the costs of options granted during the quarter.

However, options account for 13 percent of Amazon's outstanding shares, the company said. Meanwhile, the company raised $42.9 million from employees exercising their options during the quarter.