Under SFAS 123R (paragraph 51), a company must recognize the unrecognized value of the original stock option grant and the incremental cost incurred as a result of a stock option exchange program.
A company can make the stock option exchange accounting neutral by decreasing the number of shares received in the exchange to a level that makes the fair value of the repriced options equal to the fair value of the options received on the original grant date.
Often, the most important consequence for a company considering a stock option exchange is the accounting treatment.
During 2009, several high-profile companies decided to complete stock option exchange programs for employee stock options that were severely underwater.
For example, CNET Communications, which offered an option exchange in June 2002, used these ratios for each new option:
With increased scrutiny of executive compensation, companies have restricted the eligibility for option exchange offers.
Lastly, some arguments speak against 6&1 option exchanges as an employee retention tool.
The new exemptive order permits issuers to make stock option exchange offers without extending tender offers to all security holders of a class at the same price.
Many employee stock option exchange offers do not meet these rules because they are not offered to all holders, not offered at the same price, or both.
The staff has granted exemptions from these rules when the option exchange offer did not raise a concern about discrimination among the security holders that these rules were intended to address.
Determining whether an issuer's stock option exchange constitutes a tender offer is a legal matter that should be discussed with legal counsel.elen Bachman; CPA, is an assistant regional director in the national professional standards group of Grant Thornton LLP and chair of the NYSSCPA SEC Practice Committee.
Some option exchanges
began trading put and call equity options with flexible terms (strike price, expiration date and exercise style (e.g., American, European, etc.)).