August 3, 2005

More 123R Valuation Challenges

Following up on Broc’s July 25 blog on the challenges of option valuation under FAS 123R for expensing purposes, Mike Melbinger blogged the following on his blog, which has been getting a lot of attention:

“Apparently one of the Big Four accounting firms is taking the position that under FAS 123R the stock option grant date does not take place when the Board of Directors approves the size of the grant and the grant price, but only when a letter describing grant price, size of the award, and the terms and conditions is received by the employee.

If this extraordinary interpretation holds up, many companies will need to reconsider their current process for making stock option grants, or face negative accounting and tax implications Code Section 409A.

For example, if the Board or Compensation Committee makes a stock option award on day 1 when the price of the stock is $25, but the terms of the award are not reduced to writing and delivered to optionees until day 8 when the price is $27, then for accounting purposes the company will be deemed to have issued a discounted option, according to this Big Four firm – exercise price is $25 but FMV at the date of grant is $27.”

As Mike noted, companies may well want to contact their outside audit firm to determine the audit firm’s view on this issue.

Smaller Public Companies Ask for Comments

The SEC’s Advisory Committee on Smaller Public Companies published a series of 29 questions yesterday to solicit input from investors and companies on ways to improve the current regulatory system for smaller companies.

The questions are categorized in the following areas: general impact of SOX; SOX 404/Internal Controls; Accounting/Auditing; Corporate Governance/Listing Requirements; and the Disclosure System. Comments are due by August 31, 2005. The Advisory Committee will use the responses as it prepares its recommendations to the Commission, to be delivered by April 2006. Next up for the committee is its meeting on August 9-10 in Chicago, which will be webcast on the SEC’s website.

For more on the Committee’s work to date, check out our July-August 2005 issue of The Corporate Counsel.

Securities Act Reform in Federal Register

Today, the Securities Act Reform Release (33-8501, July 19, 2005) was published in the Federal Register, making December 1, 2005 official as the effective date. For those of you who have been carrying around the release in your briefcase waiting for a chance to read it, you may want to print out the Federal Register PDF version. If you can live without the Cost-Benefit Analysis, Regulatory Flexibility Analysis, etc., you can get the release down to 102 pages (print pages 1-68 and 78-111), unlike the 468 pages from the SEC’s pdf version.