Accounting Rules Allow “Spring-loading,” “Bullet-dodging” Option Grants

The government will not have any accounting basis for enforcement actions against companies for “spring-loading” or “bullet-dodging” stock option grants, according to Scott Taub, deputy chief accountant for the U.S. Securities and Exchange Commission (SEC ). Taub spoke at a Financial Accounting Standards Board (FASB) advisory council meeting in New York on Tuesday, Reuters reports.

Christopher Cox, SEC Commissioner, said last month that the practice of “spring-loading” is “bound up in the notion of insider trading,” according to CFO.com, suggesting that companies might still face legal action, but said that the SEC focused on insider trading in cases where it has occurred and can be proved.

“Spring-loading” occurs when a company purposely schedules an option grant ahead of the announcement of good news that will boost the stock price. “Bullet–dodging” involves setting the grant date just after a negative announcement that will be followed by a rebound in the stock price.

Taub told Reuters that the SEC was not trying to endorse the practice, and added “the accounting for those kinds of options is clear. We felt our hands were tied.”

“There are people in our building who have varying feelings about whether spring-loading is good or bad. Accounting-wise we felt stuck.”

“This is accounting literature written in the 70’s that clearly did not hold up well. We don’t get to enforce the accounting standards we wish existed, we have to enforce the accounting standards that do exist,” Taub went on to say, according to Reuters.

Cox made his comments on “spring-loading” and “bullet dodging” at a Senate Finance Committee hearing in September. Cox had said in July that “backdating is more easily determined than spring-loading, because of the nature of the evidence,” the LA Times reports.

SEC Commissioner Paul Atkins has argued that there is nothing wrong with spring-loading. Boards award options based on business judgments, Atkins said, according to the Wall Street Journal. “An insider-trading theory falls flat in this context, where there is no counterparty who could be harmed by an options grant. The counterparty here is the corporation and thus the shareholders.”

In the case of Analog Devices Inc., a Norwood, Mass., technology company, the SEC questioned the propriety of stock option grants made by the company because it did not adequately disclose that it priced stock options before the release of good financial results, the Journal says. Analog Devices is also being investigated for backdating stock options.

In another case, the SEC is looking at grants made to executives of Cybertronics Inc., a Houston medical-device maker that made grants to several executives on the day a Food and Drug Administrations advisory panel recommended approval of a Cybertronics device. Trading in the stock was halted that day and the grants used the exercise price of the previous day.

It is not clear what the tax implications are for spring-loading, says S. James DiBrnardo, a partner at Morgan Lewis & Bockius LLP, the Journal says. DiBernardo says the Internal Revenue Service (IRS) might argue that spring-loaded options are also discount options like backdated options. But he says that the IRS would have a much more difficult time proving their case, because they would have to prove the “true” market value on the date the spring-loaded options were granted.

You may like these other stories...

Camp Hopes Estate Tax Will Be on Its Way OutAn article in Bloomberg said that Republicans are considering voting this year to repeal the U.S. estate tax, according to House Ways and Means Chairman Dave Camp (R.-Mich.). He...
Read more from Larry Perry here and in the Today's World of Audits archive.Learning "how" to audit cash is mainly learning "when" to audit cash and to "what extent" cash auditing procedures...
Senate Takes Different Approach from House for Highway and Bridge FundEarlier this week, according to a New York Times article, the Senate agreed to fill the coffers of the fund that pays for highway and bridge repairs with...

Upcoming CPE Webinars

Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.
Aug 20
In this session we'll review best practices for how to generate interest in your firm’s services.
Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.