Volume 14, No. 12

 

3rd Quarter Update: "Accelerated Vesting" Continues Accelerating  In this first year Section 404 reviews, where most substantially-sized firms dot the i's and cross the t's in their financial reporting to investors, it's ironic that many firms have taken the low road by trying to do an end-run around FASB Statement 123(R). Currently, the compensation expense tied to stock option grants is shown as a mere footnoted amount for most firms; when the new standard becomes effective for all firms in years beginning after 6/15/2005, the remaining value of option grants will actually start being charged to earnings, usually over the remaining vesting period. The end-run? By accelerating the options' vesting immediately, all of the expense is recorded in the period the vesting occurs. By accelerating vesting before the new standard goes into effect, such expense is recorded as a footnote amount, where it's more likely to be ignored than when it's displayed in reported earnings after Statement 123(R) is effective. Is such a move in conformity with GAAP? Certainly - but it's a gamey kind of transaction motivated by accounting outcomes rather than a desire to tell shareholders what was happening in their firm. It's the year's hottest investment fashion: instead of a fleece vest, it's a vesting fleece of shareholders.

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