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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

Apr 28

Written by: Jack Ciesielski
4/28/2005 7:02 AM 

On April 14, the SEC overrode the FASB on the implementation of Statement 123(Revised), making it effective for calendar year registrants in 2006, while fiscal year filers still had to implement it.

Prior to the SEC's interference, there had been a run on accelerating the vesting of underwater stock options: managements clearly had wanted to eliminate as much future expense as they could. They coaxed their boards into approving early vesting acceleration to push all the associated option compensation into the footnotes before Statement 123(Revised) went effective.

Once the SEC's action was announced, there was a decrease in the volume of companies hitting the accelerator. They might be postponing work they intend to do later; or they might believe that the SEC's action might lead to a more permanent ditching of the standard.

A week after the SEC's interference, however, a couple of smaller firms announced accelerations: one which made complete sense (from the point of view of someone trying to evade accountability, that is), because it has a June 30 year end and will have to employ Statement 123 (Revised) quite soon. That firm was little SBS Technologies. Interesting phrasing in their 8-K on the rationale for the move: "In response to SFAS 123R, on April 21, 2005, the Board of Directors of SBS approved the acceleration of the vesting of all outstanding unvested stock options with an exercise price greater than $9.22 (the Acceleration)...SBS' decision to accelerate the vesting of these options was in anticipation of compensation expense to be recorded subsequent to the effective date of SFAS 123R on July 1, 2005 in connection with outstanding unvested stock options issued to employees."

No bones about it. "We did it because we don't like 123R."

The other acceleration took place on the same day as SBS Technologies' at somewhat larger Sinclair Broadcast Group. And their rationale was almost as forthright: "The decision to accelerate the vesting of all unvested options, which the Company believes to be in the best interest of its shareholders and employees, was made primarily to reduce compensation expense that would have been recognized in future periods following the Company's adoption of Financial Accounting Standards Board Statement No. 123, “Share Based Payment (revised 2004)” (“FAS 123R”)... The acceleration of vesting will reduce the Company's compensation expense related to these options by $0.8 million (pre-tax) in aggregate for the years 2006 through 2008, the original remaining vesting period."

Every penny counts. At least when it comes to not recording compensation expense.

Will companies continue their acceleration binge? There'll probably be a steady stream of the fiscal year companies accelerating them; there's yet to be acceleration news from one of the really big fiscal year "expensing opponents" like Cisco. If something like that happens, there's bound to be a flood of "me too" actions. For now, though, it looks like the calendar year companies are taking a rest - Sinclair, so far, is an outlier. Maybe the calendar year firms will continue to rest until the fourth quarter, if it looks like Statement 123R is going to live. And a lot of that will depend on how well HR 913 does between now and the end of Congress.