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16-Sep-2020 11:40

After 123R, the “fair value” of discounted options will be greater than the “fair value” of comparable undiscounted options, resulting in higher compensation expenses.If the compensation expense is not properly reflected in earnings, the company’s financial statements will be inaccurate and restatement of the financials may be required.Law360 (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.The term “backdating” refers to a number of option granting practices in which the reported grant date is different from the date on which the option is actually awarded, resulting in an option that is already “in-the-money” at the time of the grant.In its most basic form, backdating can range from the blatant falsification of a document to take advantage of a lower stock price to allowing executives to select a grant date during a specified period, for example during the 30 days after the grant is approved by the board or committee.Options granted as of the commencement of employment based on the market price as of the date of acceptance may be problematic if the plan does not permit below-market grants or the grant is not treated as a discounted option for accounting and tax purposes.

Before FAS 123R, generally only options granted below fair market value resulted in any compensation expense.

The SEC’s Enforcement Division and the offices of the United States Attorney are investigating the option granting practices of dozens of companies and actions taken by their executives.

Several companies have expressed their intent to restate financial statements due to option timing issues, and opportunistic attorneys have already filed derivative and class action lawsuits.

Under Section 409A, the recipient could be subject to acceleration of taxable income and additional taxes and penalties, and the company could be subject to special tax withholding and reporting requirements.

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Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the

Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.

An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the $1 million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.

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Options granted at less than fair market value or without proper board or committee approvals may violate the terms of the applicable option plan, with the result that options could be invalid.An option granted at less than fair market value will also not qualify as “performance based compensation” and thus must count toward the $1 million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.

million executive compensation deduction cap under Section 162(m) of the Internal Revenue Code.



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