SEC Issues Guidance on Accounting for Backdated Options

On September 19, the SEC's chief accountant issued guidance on the circumstances under which companies must restate their financials if they discover historical problems with the timing of their stock option grants. The guidance, which was not approved by the full SEC, applies to awards accounted for under APB 25, which allowed most stock options granted at fair market value to result in no accounting consequences for the company. Under the new guidance, companies that had short delays in the administrative procedures needed to finalize at-the-money grants will not face accounting consequences as long as the terms of the grant and the recipients were fixed and unchangeable on the date recorded as the grant date. In contrast, companies that set the exercise price of options at the stock's lowest price in a specified period (for example, by setting an exercise price of the lowest fair market value in a 30-day period) must record the difference between the exercise price and the stock's actual price on the last day of that period as an expense on their income statements. Further, companies that did not follow such a practice but changed the terms of their awards before all required granting actions were complete (for example, by reducing the exercise price) would have to expense the award between the date of the modification and the date the award was exercised, forfeited, or expired unexercised.