Backdating and spring loading stock options intentional dating
However, we understand that some companies have accounted for their option grants using a measurement date that is other than the date at which all required granting actions have been completed.
Two such examples that we have become aware of are as follows.
In many cases, when options were awarded before (or in the absence of) completion of required granting actions, the terms cannot be considered to have been determined with finality until (and unless) such actions were completed.
Indeed, as evidenced by some of the option granting practices and patterns of conduct that the staff has become aware of, awarding options in a manner that did not comply with the required granting actions does suggest that the terms and recipients of the options may have been subject to change.
As always, we encourage companies that have questions about the application of the accounting literature to consult with us. As noted previously, pursuant to paragraph 10(b) of Opinion 25, the measurement date for determining the compensation cost of a stock option is the first date on which both of the following are known: (1) the number of options that an individual employee is entitled to receive and (2) the option or purchase price.
Thus, even if documents related to an award of options are dated as of an earlier date, the measurement date cannot occur until the date the terms of the award and its recipient are actually determined.
The Office of the Chief Accountant has prepared this letter to discuss certain of the existing accounting guidance related to grants of stock options.
Lawrence Salva, Chairman Committee on Corporate Reporting Financial Executives International200 Campus Park Drive, PO Box 674Florham Park, NJ 07932-0674 Mr.
Sam Ranzilla, Chairman Center for Public Company Audit Firms American Institute of Certified Public Accountants Harborside Financial Center 201 Plaza Three Jersey City, NJ 07311-3881 September 19, 2006 Dear Sirs: Several companies have recently issued press releases announcing the restatement of their financial statements due to errors in their accounting for grants of stock options to employees, members of the board of directors, and other service providers.
As with all staff guidance, this letter has not been approved by the Commission.
The accounting guidance applicable to the grants in question was, in most cases, Accounting Principles Board Opinion No.
The staff believes that a conclusion that a measurement date occurred before the completion of required granting actions must be considered carefully, as the fact that the applicable corporate governance provisions, terms of the stock option plans, or applicable laws require certain procedures to be completed in order to effect a stock option grant suggests that option terms may not have been final (or “known”) until those procedures were completed. 44, “Accounting for Certain Transactions Involving Stock Compensation” (Interpretation 44) addresses a similar circumstance, noting that a measurement date for an option cannot occur before shareholder approval except in the very limited circumstance that management and the board of directors control sufficient shareholder votes to approve the plan.