IRS Executive Compensation Audit Program

S_Huffstetler

Informations

• Publié par: Shiem
• Nombre de lectures: 164
• Langue: English

Extrait

DELAWARE

GEORGIA

NORTH CAROLINA

SOUTH CAROLINA

VIRGINIA

WASHINGTON, DC

SEC OFFICE OF THE CHIEF ACCOUNTANT ISSUES GUIDANCE

ON ACCOUNTING FOR STOCK OPTIONS

September 28, 2006

Introduction

Partly in response to recent controversies regarding option grant practices, the Office of the Chief

Accountant (the “OCA”) of the Securities and Exchange Commission issued a letter earlier this month

summarizing its views regarding the accounting for stock options in the historical financial statements of

public companies.

Prior to the adoption of Financial Accounting Standards Board (“FASB”) Statement

No. 123 (revised 2004), “Share-Based Payment” (“Statement No. 123R”), most public companies

accounted for stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock

Issued to Employees” (“Opinion 25”).

The OCA letter discusses the accounting consequences under

Opinion 25 of a variety of circumstances related to prior award grants.

Notably, the letter addresses only

the effect of these accounting issues on a company’s financial statements and footnotes and does not

address disclosures outside of the financial statements or other actions that may be required with respect

to possible violations of laws or regulations.

The full text of the letter may be accessed at

http://sec.gov/info/accountants/staffletters/fei_aicpa091906.htm

Discussion of OCA's Accounting Guidance

The OCA's letter is particularly helpful since it notes that, although many of the recently-

uncovered option grant practices have resulted in negative accounting consequences, the OCA

acknowledges that, depending upon the facts and circumstances, there may be situations where

“unimportant delays in the completion of administrative procedures” to document grants may have no

accounting consequences as long as the grants were initially decided with finality and no

misrepresentations were involved.

A brief summary of the OCA's principal guidance follows:

•

Dating an Option Award to Predate the Actual Award Date.

Under 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 the option grant documents 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.

•

Option Grants with Administrative Delays.

Typically, a company’s corporate governance

provisions, stock option plans and applicable laws specify the actions required in order to effect the grant

of a stock option, and the date on which these actions are completed is considered the measurement date.

However, some companies have used a different measurement date when, for example, the company has

delegated the granting authority to an officer, who designated the grants within specific parameters

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previously determined by the board and obtained the appropriate approvals at a later date.

In these cases,

some companies have argued that the measurement date occurred before the required granting actions

were completed because all option terms and recipients were final at an earlier date, and the completion of

the required granting actions represented only an administrative delay.

The OCA states that the

measurement date cannot occur until the persons empowered to make the grants have determined

with

finality

the terms and recipients of those awards.

Thus, if a company operated as if the terms of its awards

were not final prior to the completion of all required granting actions (such as by retracting awards or

changing their terms), the measurement date for all of that company’s awards (including those that were

not changed) would be delayed until the completion of all required granting actions.

On the other hand,

in certain instances where a company’s facts, circumstances and pattern of conduct evidence that the

terms and recipients of a stock award were determined with finality on an earlier date before completion

of all required granting actions, it may be appropriate to determine that a measurement date occurred prior

to the completion of these actions.

•

Validity of Prior Grants.

In the case where the validity of past option grants has been

called into question (such as when awards were granted in excess of a plan’s award limitation), the OCA

believes that the substantive arrangement that is mutually understood by both the company and its

employees represents the underlying economic substance of the past option grants and should serve as the

basis for the company’s accounting.

Thus, assuming all other conditions for the establishment of a

measurement date have been satisfied, it is appropriate to account for the awards as fixed options with a

measurement date on the date that the terms and recipients were determined with finality.

•

Uncertainty as to Individual Award Recipients.

Some companies have approved option

awards before the number of options to be granted to each individual employee was finalized.

The OCA

states that, in certain circumstances, the award may contain sufficient specificity to determine the number

of options to be allocated to individual employees, notwithstanding the absence of a detailed employee

list.

For example, if management’s role was limited to ensuring that an allocation was made in

accordance with definitive instructions (e.g., the approved award specified the number of options to be

granted based on rank within the company), the measurement date could be the date the award was

approved.

However, if management had discretion to determine the number of options to be allocated to

each individual employee, the measurement date could not occur prior to the date on which the allocation

was finalized.

•

Exercise Price Set by Reference to a Future Market Price.

Some companies have

awarded options that contain a formula for establishing the exercise price, for instance, based on a 30-day

average of the stock price following the grant date.

If the original terms of a stock option provide for a

reduction to the exercise price if a specified future event or condition occurs, variable accounting would

be required from the award approval date until that uncertainty is resolved.

A measurement date would

occur and variable accounting would cease at the date the contingency is resolved or expires.

On the

other hand, if the original terms of the award do not contain an adjustment contingency and the exercise

price is nonetheless reduced after the award approval date, a repricing has occurred.

Variable accounting

would therefore be appropriate from the date of the modification to the date the award is exercised, is

forfeited or expires unexercised.

•

Grants Prior to the Commencement of Employment.

In some cases, companies have

determined the terms and conditions of awards to new employees before the commencement of their

employment (for instance, by fixing the option price in the offer letter prior to the date the person became

an employee).

If the individual provided no services to the company prior to commencing employment,

generally a measurement date cannot occur prior to the date that the individual began rendering employee

service.

However, if the employee rendered services to the company prior to commencement of

employment, FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“Statement No.

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123”), and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than

Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” should be applied.

•

Documentation of Option Granting Activities is Incomplete or Cannot be Located.

The

OCA states that the appropriate accounting where records documenting grants cannot be found or may be

inaccurate will depend upon the facts and circumstances.

The OCA does not believe that a company’s

ability to locate complete option grant documentation several years after the grant dates should

necessarily result in a default to variable accounting or to treating the awards as if they had never been

granted.

Rather, a company must use all available relevant information to form a reasonable conclusion

as to the most likely option granting actions that occurred and the dates on which such actions occurred in

determining the proper accounting.

•

Timing of Option Grants.

For companies that have engaged in techniques to select their

award dates in coordination with the disclosure of information to the public, questions have arisen as to

whether an adjustment would be necessary to the market price of the stock at the measurement date for

the purpose of measuring compensation cost.

The OCA believes that compensation cost must be

computed on the measurement date by reference to the unadjusted market price of a share of stock of the

same class that trades freely in an established market.

•

Changes to Option Grants Due to the Release of New Information.

For companies that

have changed the terms of previously granted awards (for instance, lowered option prices) due to the

release of new information to the public, the OCA believes that a repricing has occurred and variable

accounting should be applied to the option from the date of modification to the date the award is

exercised, is forfeited or expires unexercised.

•

Income Tax Benefits Related to Options.

Some companies may have documented option

exercises as though such exercises occurred as of a date other than the actual date of exercise, which

resulted in a reduction of the amount of income taxes due by the employee and a corresponding reduction

in the income tax benefit received by the company.

The OCA believes that the company should record

the excess tax benefit it otherwise would have been entitled to receive on the actual exercise date as an

addition to paid-in capital.

Any amount of such benefit forgone by the company due to the

mischaracterized exercise, and any other tax obligations of the employee paid by the company, should be

recorded as compensation cost to the employee.

•

Restatements and Amendments of Periodic Reports.

Companies that determine that their

prior accounting contained material errors should restate their financial statements to reflect the correction

of those errors.

Materiality is based on the facts and circumstances, and the OCA states that even

quantitatively small amounts may be material, for instance, if due to intentional error.

Where

restatements are made, companies must also disclose the circumstances that gave rise to the errors.

In

addition, previously filed periodic reports containing financial statements determined to be materially

misstated will require amendment.

Companies proposing to correct material errors without amending all

affected reports should contact the SEC’s Division of Corporation Finance for guidance.

Amendments

are not necessary to correct immaterial errors; such corrections may be made in future filings containing

the affected financial statements.

Finally, registrants that have applied Opinion 25 in historical periods

for recognition purposes and provided the footnote disclosures required by Statement No. 123 may

determine that the amount of pro forma compensation cost previously disclosed pursuant to Statement

No. 123 was erroneous.

The OCA’s views regarding Opinion 25 are not necessarily representative of its

views with respect to the determination of the grant date and measurement date under Statement No.

123R.

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Conclusion; Contact Information

Companies should keep in mind that many of the scenarios described above may raise not only

accounting issues but also issues related to the validity of equity awards, for instance, if awards were

made on terms inconsistent with plan documents.

Companies are encouraged to contact the OCA if they

have questions regarding accounting issues related to option grant practices.

In addition, the following

Womble Carlyle Corporate and Securities attorneys are available to assist you in addressing any questions

that you may have regarding the issues discussed in this client alert.

Please contact the attorney with

whom you usually work or any one of the following attorneys if you have any questions.

Garza Baldwin, III

(Charlotte)

[phone]

Jane Jeffries Jones

(Charlotte)

[phone]

Meredith P. Burbank

(Charlotte)

[phone]

G. William Joyner III

(Winston-Salem)

[phone]

Jeffrey A. D. Cohen

(No. Virginia)

[phone]

Alonzo L. Llorens

(Atlanta)

[phone]

Robert M. Donlon

(Charlotte)

[phone]

Keith J. Mendelson

(No. Virginia)

[phone]

T. Clark Fitzgerald III

(Atlanta)

[phone]

Elizabeth M. Orazem

(Atlanta)

[phone]

(Greenville)

[phone]

John D. Hopkins

(Atlanta)

[phone]

Ross H. Parr

(Charlotte)

[phone]

Jeffrey C. Howland

(Winston-Salem)

[phone]

Kenneth N. Shelton

(RTP)

[phone]

Womble Carlyle client alerts are intended to provide general information about significant legal

developments and should not be construed as legal advice regarding any specific facts and

circumstances, nor should they be construed as advertisements for legal services.

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform

you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or

written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal

Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter

addressed in this communication (or in any attachment).

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