Fasb backdating stock options

Finally, discount options cannot qualify for the favorable tax treatment provided for incentive stock options.

The foregoing tax consequences could be affected by applicable statutes of limitations, may include additional reporting and withholding obligations, and may affect the financial accounting for taxes related to the options.

However, prior to reviewing the litany of potential legal issues, we think it is important to draw a line (similar to that drawn in GAAP between “errors” and “irregularities”) between circumstances involving serious legal/governance issues and technical noncompliance issues that many, if not most, companies will confront when reviewing their historical option grant practices.

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Theories for Potential Civil and Criminal Liability.

Because improper accounting and disclosure regarding a company’s option grant practices can have a material impact on the accuracy of its financial statements, claims under multiple federal and state statutory provisions, as well as common law, are likely if disclosure of improper practices becomes required.

The charges allege that the company routinely backdated stock option grants without recording necessary compensation expenses as required by GAAP.

If found guilty, the executives face up to 20 years in prison with respect to the criminal charges and a $5 million fine with respect to the civil charges. deceives investors and the market as a whole about the financial health of companies that cheat in this way.” Chairman Cox suggested that additional charges may be brought against other companies under investigation as the SEC “is committed to bringing [options backdating] to an end nationwide.” Restatements.

More than 80 companies are currently the subject of one or more investigations.

Some state attorneys general have also begun investigations concerning option-granting practices.

In connection with announcing the charges, SEC chairman Christopher Cox stated that “options backdating strikes at the heart of investor confidence in our capital markets [and] . An immediate risk facing some companies under investigation is the potential restatement of historical financial statements resulting from the failure to record compensation expense with any backdated options.

Under the long-standing APB 25 accounting standards (which have been superseded by FAS 123R), compensation expense for option grants needed to be recorded only if the exercise price was less than the fair market value of the underlying stock at the date of the option grant – so-called discount options.

However, the potential consequences of such actions should be carefully considered.

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