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SEC Staff Provides Views on Stock Option Accounting Practices

SEC Staff Provides Views on Stock Option Accounting Practices

September 19, 2006

FEI Summary



The Office of the Chief Accountant of the U.S. Securities and Exchange Commission (SEC) issued a letter today to Larry Salva, Chairman of FEI’s Committee on Corporate Reporting (CCR) and Sam Ranzilla, Chairman of the Center for Public Company Audit Firms expressing its views on the “appropriate application of the stock option accounting literature”. This letter addresses the practices that have led up to recent company press releases announcing 1- restatements due to errors in accounting for grants of stock options as well as 2 – that companies are looking into their past practices related to the granting of stock options.


According to SEC Chief Accountant Conrad Hewitt, “The views expressed in this letter will assist in the resolution of accounting issues that have been raised during reviews of past stock option grants in a way that benefits investors and the capital markets.”


Prior to the adoption of the Financial Accounting Standards Board’s Statement No. 123 (revised 2004), “Share-Based Payment,” many public companies accounted for stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”  As indicated in the letter, the topics addressed largely relate to “questions about whether a company’s determination of the measurement date of past stock option awards was appropriate.” Specifically, the letter discusses the accounting consequences under Opinion 25 for the circumstances listed below:

·         Dating an option award to predate the actual award date,

·         Option grants with administrative delays

·         Uncertainty as to the validity of prior grants

·         Uncertainty as to individual award recipients

·         Exercise price set by reference to a future market price

·         Grants prior to the commencement of employment

·         Documentation of option granting activities is incomplete or cannot be located

·         Timing of option grants

·         Changes to option grants due to the release of new information

·         Income tax benefits related to options

As with all staff guidance from the SEC, this letter has not been approved by the Commissioners.

Link to the letter: http://www.sec.gov/info/accountants/staffletters/fei_aicpa091906.htm

Other Summaries From:


Prepared Sept. 19, 2006 by Christine DiFabio (cdifabio@FinancialExecutives.org), Director, Technical Activities, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.