Backdating employee stock options accounting and legal implications

A quick examination of the cases against Brocade clearly identifies why backdating is synonymous with fraud, even though no U. The practice involves using hindsight to assign a stock-option contract an earlier date than its actual grant date.

By pushing the date into the past, to a time when the underlying stock traded at a lower price than it did the day the grant was issued, the option holder is, in effect, being given the promise of cash.

If the company sets the prices of the options grant well below the market price, they will instantaneously generate an expense, which counts against income.

The backdating concern occurs when the company does not disclose the facts behind the dating of the option.

Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.

Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.

Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.

Section 162(m) limited the deductibility of compensation in excess of

Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.

Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.

Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.

Section 162(m) limited the deductibility of compensation in excess of $1 million paid to certain top executives, but exempted certain performance-based compensation such as stock options.

As Chairman Cox noted in testimony last fall: "the stated purpose [of Section 162(m)] was to control the rate of growth in CEO pay.

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Indeed, with more than 80 companies being reviewed by the SEC for potential illegal backdating practices, and one academic study claiming that more than 2,000 companies have engaged in the practice, civil and criminal charges will probably mushroom in the next few months. The purpose of backdating is straightforward: it gives options holders an immediate paper gain, and a real gain once the option is exercised.Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.Thus, the option becomes "in the money", meaning there was a built-in profit on the underlying stock, on the grant date.Section 162(m) limited the deductibility of compensation in excess of $1 million paid to certain top executives, but exempted certain performance-based compensation such as stock options.As Chairman Cox noted in testimony last fall: "the stated purpose [of Section 162(m)] was to control the rate of growth in CEO pay.

million paid to certain top executives, but exempted certain performance-based compensation such as stock options.

As Chairman Cox noted in testimony last fall: "the stated purpose [of Section 162(m)] was to control the rate of growth in CEO pay.

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That promise is considered to be an in-the-money options grant.

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