Volume 15, No. 11

 

Options Closed:  The End Of "Accelerated Vesting"  Before there was option backdating, there was option vesting accelerating. It seems so 2005 now, as investors wonder what companies will be fingered next by the SEC or the US Office of the Attorney General - and for the most part, it is 2005's option compensation accounting issue. It lingered into 2006 because firms had until their fiscal year beginning after 6/15/2005 to put Statement 123(R) into effect. That awkward effective date made it possible for companies with fiscal years ending through May 2006 to "accelerate the vesting" of outstanding options and avoid recognizing the value of those options as compensation expense in earnings reported after 6/15/2005. The accelerated vesting gambit started in the summer of 2004, and it's now run its course: any firm that accelerates the vesting of employee stock options now will have to recognize the effect in earnings instead of easing it past investors through the footnotes. Vesting acceleration gave firms that ability to hide compensation expense a little longer. Investors may regard backdating as the more serious of the two option accounting transgressions but so far there are precious few details known about the extent and severity of backdating issues. Investors may tend to dismiss the acceleration of options as a non-event, yet the acceleration of options caused massive under-reporting of compensation expense. Worse: while companies may have defended their acceleration actions on the grounds that they related to only "out-of-the-money" options, some of those options have now come "into-the-money." Over $400 million of intrinsic value is now realizable by employees of just 49 firms that accelerated their "out-of-the-money" options over the last several years. No waiting, and no backdating - accelerating the vesting made it money for nothing. Speaking of backdating: some companies now in the news for backdating were accelerators as well.

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