On September 19, 2006, the SEC’s Office of the Chief Accountant (OCA) issued a letter that provides guidance regarding accounting for stock options in historical financial statements of public companies. OCA’s guidance relates to accounting for options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), which all public companies could apply in fiscal years beginning prior to June 15, 2005. APB 25 therefore governs the accounting treatment for many of the option grants now under investigation.

On August 11, 2006, the U.S. Securities and Exchange Commission (SEC) adopted major amendments to the disclosure requirements for executive and director compensation in a 436-page release. These amendments clarify and expand the existing compensation tables, and require extensive narrative disclosures to supplement the tabular information. Companies generally must comply with the amendments (1) in Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006, and (2) in registration statements under the Securities Act or the Exchange Act, proxy statements and information statements that are filed on or after December 15, 2006 and that are required to include compensation and related party transaction disclosure for fiscal years ending on or after December 15, 2006.

In conjunction with the adopted amendments to the executive and director compensation disclosure requirements (see SEC Update "SEC Adopts Major Changes to Compensation Disclosure Requirements"), the U.S. Securities and Exchange Commission also modified Form 8-K and amended the disclosure requirements for related party transactions, corporate governance matters, and security ownership of officers and directors. As part of the compensation disclosure release, the SEC also adopted amendments to other disclosure provisions relating to executive and director compensation. The modified disclosure requirements relate to compensation disclosures in Form 8-K reports, related party transactions, corporate governance matters, and security ownership of officers and directors. The Form 8-K revisions will apply to triggering events that occur on or after the 60th day following publication of the revisions in the Federal Register, expected later this month. Companies generally must comply with the other modified disclosure requirements (1) in Forms 10-K and 10-KSB for fiscal years ending on or after December 15, 2006, and (2) in registration statements under the Securities Act or the Exchange Act, proxy statements and information statements that are filed on or after December 15, 2006 and that are required to include compensation and related party transaction disclosure for fiscal years ending on or after December 15, 2006.

In November 2005, a publicly-traded company announced the resignation of three of its top executive officers following an SEC investigation into the backdating of stock option grants. Since then, more than 20 companies have announced the formation of independent committees to investigate option granting practices or the existence of a government investigation into their option grants.

Options to buy company stock (“stock options”) and rights to share in the appreciation of company stock (“stock appreciation rights” or “SARs”) are a tax-advantaged way to reward key employees without having to pay out additional current compensation. However, proposed regulations to newly enacted §409A of the Internal Revenue Code impose restrictions on stock options and SARs. Failure to satisfy §409A results in immediate taxation of the value of the stock options or SARs, imposition of imputed interest, and a 20% penalty tax.

This Update discusses a year-end reporting requirement and the associated January 31 deadline for businesses that have granted incentive stock options. This Update will be of interest to those businesses that have granted incentive stock options.

This Alert will serve as a reminder of certain year-end reporting requirements imposed with respect to incentive stock options and employee stock purchase plans.

We expect recently-issued proposed regulations under Section 409A of the Internal Revenue Code, along with recent changes in financial accounting rules and practices, to significantly and immediately affect the way in which private companies set the exercise prices for their stock options and values for other stock-based compensation.

Recently-issued proposed regulations under Section 409A of the Internal Revenue Code provide some guidance and flexibility for public companies in setting the exercise prices for their stock options, base prices for stock appreciation rights (“SARs”), and values for other stock-based compensation.

This update discusses the FASB's position that the grant date for a share-based payment award is established after the approved grant is communicated to the employee. This update provides a guide of how to determine the grant date under FASB Statement Number 123(R).

As reported in a previous Cooley Alert, FAS 123(R), which requires that the compensation charge for most equity-based awards be measured on the “grant date” of that award, states that a “grant date” occurs when there is a “mutual understanding” of the key terms and conditions of stock awards. The Financial Accounting Standards Board (FASB) initially took the position that a mutual understanding could not occur until an award’s key terms and conditions were communicated to the employee receiving the award.

The FASB is at it again. As reported in a prior Cooley Alert, soon all companies, public and private, will need to account for share-based payments (e.g., stock options) based on their fair value at the date of grant. As many companies struggle to determine how to measure the fair value of a share-based payment, they will now also have to focus on when to make that measurement.

Yesterday, the IRS announced a settlement initiative affecting executives (and their companies) that participated in certain tax avoidance transactions involving stock options or restricted stock.