The following is a brief timeline of some of the major changes which have resulted in backdating becoming more difficult: Until the SEC adopted these new rules, detailed line-item disclosure about company share option grant practices was not required.
The new rules provide guidance and require detailed disclosure in table form and text.
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Importantly, any information relating to a company practice setting the strike price based on a date other than the actual grant date must be disclosed.
Although these developments have occurred since 2002, the prevalence of backdating was not discovered until 2005.
This may mean a restatement of earnings will be necessary.
As share options are considered a form of employee compensation in the US, they create income tax liabilities for employees and opportunities for tax deductions for employers.
Therefore, as long as a company granted options to employees with an exercise price equal to the fair market value on the measurement date, it could compensate its executives with options without recognising a compensation expense that would negatively impact its net income and profits.
Even if documents related to an employee-option award were dated earlier, the measurement date could not occur until the terms of the award and its recipients were fully determined.
To correct the erroneous accounting treatment, the company would need to restate its financials back to the date when the options first vested and continue through the life of the option.
The restating is subject to the requirements under section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) of accurate and timely financial reports.
Law360, New York (June 15, 2006, AM EDT) -- It is virtually impossible to pick up a newspaper these days and not see an article about the ever-growing list of companies being caught up in investigations concerning allegations of backdated stock options.
Despite the attention paid to this issue, little has been written explaining why backdating options is problematic and potentially illegal.
In that year, Professor Erik Lie at the University of Iowa published a study on the University website which found an alarming propensity for option grants to occur when company share prices were unusually low relative to their historical trading levels.