Options for Nothing

Things
are bad out there.  I'm not talking about the freezing temperatures and
snow that much of the country is experiencing (that's bad, but weather
is a topic for someone else's blog); I'm talking about underwater stock
options.  The market is so depressed that some companies have options
so far underwater that they think their employees might be willing to
voluntarily give them up for nothing in return--no cash, no new stock
option, no stock or units--zip, nil, nada, a big fat $0.  I've
had enough people ask me about this that I've decided to make it the
topic of today's blog. 

You Aren't Doing Your P&L Statement Any Favors

From an accounting standpoint, this strategy doesn't do anything for
you.  If the options are fully vested, you've already fully expensed
them and you don't reverse any of that expense.  If the options aren't
fully vested, then the transaction is viewed as akin to an acceleration
of vesting and all remaining unamortized expense is recognized
immediately. Don't believe me--check out paragraph 57 in SFAS No. 123(R). 

In this scenario, the company would be ahead if the employees kept
their options. Some of the employees are surely going to terminate
before their options vest, forfeiting their unvested options; when that
occurs, no further expense is recognized for the forfeited options.  By
having employees voluntarily surrender their options, the company loses
the opportunity to reduce the expense for future forfeitures upon
termination.

Some members have wondered if the company would have to be careful
about making future grants, lest they be combined with the voluntary
surrender of the underwater options and the whole thing treated as a
repricing.  I'm not terribly concerned about this, at least from an
accounting standpoint, because the company would come out ahead if the
surrender and new grants were treated as a repricing. 

Let's say that an employee holds a option granted a year ago to purchase 1,000 shares at a

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