Backdating stock options wikipedia

10-Sep-2017 12:45

backdating stock options wikipedia-17

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What is illegal is the improper disclosures, both in financial records and in filings with the United States Securities and Exchange Commission (SEC).Options backdating effectively transfers wealth from existing shareholders to management by diluting the EPS. Options backdating is the practice of granting an employee stock option that is retroactively dated to increase its value.The practice of backdating itself is not illegal, nor is granting of discounted stock options.To avoid having to pay higher taxes, many companies adopted a policy of issuing “at the money” stock options in lieu of additional income, with the idea that the executive or employee would benefit through the option by working to increase the value of the company without exceeding the one million dollar deductibility cap for executive income.

Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.

Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.

(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.

Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.

This is a way of repricing options to make them valuable or more valuable when the option " The SEC’s opinions regarding backdating and fraud were primarily due to the various tax rules that apply when issuing “in the money” stock options vs., intentional backdating that coincides with low underlying stock prices and an accounting report that claims the contracts to have been issued on those low dates as “at the money” – rather than “in the money” – contracts has resulted in the SEC’s public view that backdating could be considered fraudulent.