Stock option backdating accounting

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.

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It turns out that Jobs did, indeed, receive backdated options—just not at his own direction. 18, 2001, when the stock stood at $21.01, the company gave Jobs a monster 7.5-million-share options grant dated Oct. By doing so, the company gave Jobs $20 million in compensation for which it did not account properly. It also pretended the options grant was approved at a special board meeting, when no such meeting occurred. He received a massive grant that was approved at a phantom board meeting, though he didn't know about the phony meeting.

And he never cashed in those options because they were replaced in 2003 by a grant of restricted stock.

Take this example, from The Wall Street Journal, which began investigating the practice last fall: "Suppose an executive gets 100,000 options on a day when the stock is at $30.

Exercising them after it has reached $50 would bring a profit of $20 times 100,000, or $2 million.

Apple has essentially blamed former chief financial officer Fred Anderson and former general counsel and board secretary Nancy Heinen, both of whom are no longer with the company.

But Apple makes clear that Jobs was directly involved in some instances of backdating.

ESOs are usually granted at-the-money, i.e., the exercise price of the options is set to equal the market price of the underlying stock on the grant date.

Because the option value is higher if the exercise price is lower, executives prefer to be granted options when the stock price is at its lowest.

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.

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