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More than $1 billion of stock option expense has circumvented income statement recognition in future periods due to the accelerated vesting, according to one estimate.
Stephen Taub, CFO.com | US
April 12, 2005
At least 102 companies have accelerated the vesting of stock options before a new options-expensing rule takes effect, according to a report by Bear, Stearns. About one-third are technology companies; 12 of the 102 accelerated both in-the-money and out-of-the money options.
More than $1 billion of stock option expense has circumvented income statement recognition in future periods due to the accelerated vesting, estimated Bear, Stearns, which added that "we expect more companies to announce such actions as we approach the effective date" of the rule.
By June 15, most public companies will be required to implement Statement 123R, the Financial Accounting Standards Board's revised rule on expensing employee stock options. Private and small companies have until December 15.
Bear, Stearns noted that recent guidance from the Securities and Exchange Commission does not prohibit the acceleration of out-of-the money or in-the-money stock options, but it does requires disclosure and the reasons for the vesting acceleration.
When Statement 123R goes into effect, the investment bank pointed out, companies will begin amortizing to income the grant-date fair value of all unvested options. "By vesting out-of-the-money options, the future stock option expense from these options will vanish from the income statement," it explained. "That is, companies will record the unamortized fair value of those options only in the footnote disclosure to their financial statements in the period in which options' vesting is accelerated."
Depending on the timing, employee forfeitures, and stock price, companies might need to record a charge for accelerating the vesting of in-the-money options, noted Bear, Stearns, which added that this point was not dealt with in the SEC guidance.
Bear, Stearns also observed that vesting acceleration might be worthwhile for companies that are cutting down or eliminating stock-option compensation. "If these previously issued options were included in the amount expensed," added the bank, "it would provide the company with increasingly favorable expense comparisons as the expense from these unvested out-of-the-money stock option tranches run off."