Many people regard the benefit of share F options to an employee as being the difference between the market value of the shares on exercise of the options and the exercise price paid by the employee to obtain the shares; only exercise date
measurement will ensure that the amount recognized by the entity is the same amount as the perceived value of the benefit to the employee.
Income tax is assessed on the difference between the FMV of the shares on the exercise date
and the purchase price paid.
In addition, the employee must have been continuously employed by the company that granted the ISO from the grant date up to three months before the exercise date
(except in the case of death or disability).
These phantom shares have a fixed exercise date
and formula for calculation.
While the exercise date
approach results in more volatility in reported results, that is appropriate given the substance of the transaction between the company and the option holder.
If the measurement date for compensation expense is moved to either the vesting date or the exercise date
, uncertainty is introduced: The final expense figure will not be known until sometime after the grant date, and there would be constant revision of the estimated total cost as the value of the option changes.
Mary's AMT basis matches the high FMV on the exercise date
and if she sells the stock for peanuts in 2001, the transaction will produce minimal if any regular tax (low basis, low sales price) and a large AMT capital loss (high basis, low sales price).
In many foreign countries, local nationals are taxed at the option exercise date
in a manner similar to that in the United States.
For purposes of the AMT, a taxpayer's regular taxable income must be adjusted to include the difference between the ISO's exercise price and the underlying stock's fair market value on the exercise date
30 for a period of 10 consecutive trading days, then, at the Company's sole discretion and upon the Company sending the holder written notice of such Accelerated Exercise Date
(the "Notice") and issuing a news release announcing such Accelerated Exercise Date
(the "News Release"), the day that is 21 days following the later of: (i) the date on which such Notice is sent to the holder; and (ii) the date on which the News Release is issued.