The NASPP Blog

Last week I blogged about the accounting treatment of acceleration of vesting under 123(R), pointing out that, to my surprise, even an acceleration of vesting that is not connected with termination of employment can sometimes result in incremental compensation cost.

This week, I take a look at another unexpected outcome; that the acceleration of vesting might not change the period over which the company must record the remaining unamortized expense or might even make this period longer.

Who Cares?
Some companies with underwater stock options are considering accelerating vesting for the options. This doesn’t really do much in terms of making the options more valuable to employees–they are still underwater, after all–so that’s not the goal. Instead, the idea is to get all the remaining expense for the underwater options out of the way now, in a year when things are already looking so grim profit-wise that maybe the extra expense just doesn’t matter much. That way, the company can start next year with a clean slate, at least from a stock plan expense standpoint.

But, according to the Radford Alert “Accelerated Vesting of Underwater Options: Understanding or Discovering the Hidden Accounting,” this strategy could backfire.

Acceleration of Vesting But No Acceleration of Expense Recognition
The problem arises from footnote 69 of 123(R) (you have read all the footnotes to 123(R), haven’t you?), which states that acceleration of vesting on deeply underwater options is viewed as a non-substantive modification.  As a result the modification doesn’t have any impact on the service period of the option; expense is still recognized over the original service period.

The good news here is that this means that if employees terminate prior to their original vest dates, the company won’t recognize expense for the forfeited options.  But that’s probably small consolation for the fact that the acceleration hasn’t accomplished what the company intended. 

Acceleration of Vesting But Deceleration of Expense Recognition
Where options are only minimally underwater (i.e., aren’t deeply underwater), the result could be even more unattractive.  Here, the modification would be substantive but you would have a new option with a derived service period.  I won’t bore you with an explanation of explicit, implicit, and derived service periods (you can read about them in my article “Accounting for Equity Compensation Under FAS 123(R),” available in the NASPP’s Stock Plan Expensing Portal–see section 5.1), but the gist of it is that expense will be recognized over the period of time the company expects to elapse before the option is in-the-money.  This period would have to be determined using a lattice or more sophisticated option pricing model and could be longer than the originally stated service period.

How Deep is Deep?
FAS 123(R) doesn’t give any guidance as to what would be considered a deeply underwater option, so that’s really between you and your auditors.  Radford speculates that most underwater options would be considered deeply underwater.

More Information
For more information on this topic, read the Radford Alert “Accelerated Vesting of Underwater Options: Understanding or Discovering the Hidden Accounting,” available in the NASPP’s Underwater Options Portal. 

Thanks to Terry Adamson at Aon/Radford Consulting for bringing this to my attention and forwarding the alert to us. 

Reason #15 to Renew Your NASPP Membership:  The Fundamentals of Stock Plan Administration–New, Improved, and Online!
The NASPP’s acclaimed online course, “The Fundamentals of Stock Plan Administration,” is newly updated for 2009; the first webcast will be held on April 14.  This course covers the substantive knowledge and broad range of responsibilities associated with stock plan administration, from regulatory considerations to day-to-day procedures. It is an essential program for anyone involved overseeing stock compensation.  And, for a limited time only, we are offering a $300 discount off registration for NASPP members.  Don’t wait–you must register by March 20 to qualify for this unprecedented savings.     

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blogs. 

• Renew your NASPP membership for 2009 (if you aren’t an NASPP member, join today).
• Register for the NASPP’s newest online course “Tackling Equity Compensation Issues Related to Mergers & Acquisitions.”
• Register for the NASPP’s online course “The Fundamentals of Stock Plan Administration.” Don’t wait–members that register by March 20 save $300.   

– Barbara