The SEC is also looking into requiring additional disclosure about the cancellation of an exercise of options and how that will be treated from an accounting perspective.
The SEC got involved after some companies allowed executives that had exercised options to rescind that decision later in the same year. The companies acted after the value of the shares had dropped significantly – and after the executives involved complained that the taxes owed as a result of the exercise were greater than the value of the shares at the end of the year.
Published reports said the SEC did not name any specific companies involved, but they were believed to be technology firms.
In a memo to the Emerging Issues Task Force of the Financial Accounting Standards Board, the SEC says it will require firms to disclose these actions in their annual report. Furthermore, the transactions must be recorded as a company expense that could lower profits.
Under current tax provisions, when an employee exercises an option, the company considers any profit the employee earns as an expense. But when an option exercise is canceled, the SEC said that lost tax benefit should be treated as an expense and that unexercised option should be treated as a variable option. When that option’s value rose, the company would treat that as an expense.
However, the SEC said in some circumstances it would allow companies to reduce the size of this expense was held for over one year to obtain a more favorable, long-term capital gains tax rate.
A new proposal published in the February 1 Federal Register calls for an annual disclosure of:
- the number of securities authorized to be issued under each equity option plan
- the number actually awarded
- the number of shares issued upon exercising outstanding options, and
- the number of remaining shares that would be available for future issuance under each plan.
Comments to the proposal can be submitted electronically to firstname.lastname@example.org .