Stock option backdating accounting

Granting stock options to employees is a generally accepted and perfectly legal form of compensating employees. Critics of backdating argue that the practice is difficult to detect and thus encourages boards and executives to use it to synthesize more creative compensation packages.

In our example, backdating the options is the same as giving John Doe a check for ,000 -- without recording that ,000 on the within two business days.

In addition to being illegal, backdating isn't always a sure thing.

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When news broke, earlier this year, that some companies had backdated stock-option grants ...grants to one that is earlier than the actual grant date in order to place a lower exercise price on the options and thus enhance the potential profits from the exercise of those stock options.The practice sometimes also occurs in the insurance industry, whereby policy issuers make the effective date of a policy (or claim) earlier than the application date in order to obtain a lower premium for the customer (or obtain better claim results). When he was hired, the Company XYZ board of directors offered John an attractive salary as well as an annual grant of 1,000 Company XYZ stock options.Executives do it because they believe that if they don’t the stock market will punish them. As the investment strategist Michael Mauboussin puts it, “The market follows cash flows,” not earnings.As long as revenues and expenditures are reported honestly, [several studies show that] accounting legerdemain doesn’t fool the market. Typically, the grant date of the stock options is the same as the date of the board meeting.This is important to note, because the grant date is what determines the exercise price on the options.Those options give John the right but not the on the date of the grant.The board formally grants the stock options to John every year at its January board meeting.Commentary through the public consultation process and more formal requests for comments was highly divisive with proponents voicing strong concerns either in favour or against an amendment imposing security holder approval for dilutive acquisitions of public companies.Effective November 24, 2009, TSX amended its rules to require security holder approval for securities issued or made issuable pursuant to an acquisition of a public company where dilution exceeded 25% of the listed issuer's issued and outstanding securities.

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