887 Companies Accelerated Options Vesting

According to a study by Jack Ciesielski of the Analyst's Accounting Observer Newsletter, 887 companies accelerated options vesting between 2004 and 2006, thus avoiding reporting an estimated $6 billion in accounting costs. Under FAS 123(R), the new accounting rules that went into full effect in 2006, companies had to take a charge to compensation on their income statements for unvested options based on their grant date. Many companies had underwater options, many of which would never be exercised because they were unlikely to ever be in the money. Many consultants recommended accelerating the vesting of these options to avoid the charge. Some of the options, however, were closer to being in the money and, in 33 cases, were already in the money. The practice was a controversial one, with even some opponents of options expensing arguing that accelerating options removed part of the incentive and risk effects intended to be associated with the grants. Defenders argued that it was misleading for companies to take a charge for awards unlikely ever to have any value.