Dating of stock option grants
The mechanism involves creating entries on both the asset and equity sides of the balance sheet.
On the asset side, companies create a prepaid-compensation account equal to the estimated cost of the options granted; on the owners’-equity side, they create a paid-in capital stock-option account for the same amount.
A procedure they call fair-value expensing adjusts and eventually reconciles cost estimates made at grant date with subsequent changes in the value of the options, and it does so in a way that eliminates forecasting and measurement errors over time.
The method captures the chief characteristic of stock option compensation—that employees receive part of their compensation in the form of a contingent claim on the value they are helping to produce.
Unlike the abusive corporate tax shelter ploys which often involve complex manipulation of a transaction to achieve tax results that are inconsistent with the economic reality of the deal, stock option backdating is a relatively crude device: A corporation merely changes the date that a stock option was actually granted to an earlier time when the stock price was lower.
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.
In comparison, had the options been granted at the year-end price when the decision to grant to options actually might have been made, the year-end intrinsic value would have been zero.
At the end of the vesting period, the company uses the fair value of the vested option to make a final adjustment on the income statement to reconcile any difference between that fair value and the total of the amounts already reported. The opponents of expensing, however, continue to fight a rearguard action, arguing that grant-date estimates of the cost of employee stock options, based on theoretical formulas, introduce too much measurement error.
They want the reported cost deferred until it can be precisely determined—namely when the stock options are exercised or forfeited or when they expire.
If permissible under plan rules, you can choose dollar payroll deductions, percentage payroll deductions, or a combination of both.