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It could also lead to delays in filing financial statements while the magnitude of the problem is determined.Adverse tax consequences may result from option backdating practices.Before FAS 123R, generally only options granted below fair market value resulted in any compensation expense.After 123R, the “fair value” of discounted options will be greater than the “fair value” of comparable undiscounted options, resulting in higher compensation expenses.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.
A company may decide to grant options on a specific date but the corporate formalities may not be completed until a later date.
Another scenario involves the allocation of grants to employees from an authorized pool.
If the exercise price is set when the pool is authorized by the board or committee but the allocation and actual grants occur later (when the stock price has increased), backdating issues may arise.
Grants to new employees based on inaccurate employment commencement dates are troublesome.
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.SEC Chairman Christopher Cox recently stated that the proposed SEC rules on disclosure of executive compensation will “almost certainly address options backdating explicitly.” I. Companies have considerable discretion in determining the timing of stock option awards.