Changes to Stock Option Plans and Allocating Basis to Assets and Liabilities Acquired in a Leveraged Buyout (1991)

This month's column discusses consensuses reached by the FASB Emerging Issues Task Force EITF or task force) concerning accounting for changes to fixed employee stock option plans resulting from an eqity restructuring, and concerning allocating basis to individual assets and liabilities acquired in certain leveraged buyout transactions. EITF Abstracts, copysighted by the FASB, is available in softcover a loose-leaf versions a may be obtained by contacting the FASB order department at 401 Merfitt 7, .PO. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700. ISSUE NO. 90-9 This EITF issue, Changes to Fixed Employee Stock Option Plans as a Result of Equity Restructuring, illustrates the applicability of APB Opinion no. 25, Accounting for Stock Issued to Employees, when employers change the provisions of stock option plans following a spin-off or recapitalization. While stock option grants generally contain antidilution provisions that explain how the exercise price and number of shares will be adjusted if the employer declares a stock dividend or stock split, most plans do not contain provisions for similar adjustments if an equity restructuring occurs. These special adjustments may include n Reduction of the exercise price. n Reduction of the exercise price and an increase in the number of shares under option. * Cash payments to option holders. * Issuance of stapled or nonstapled options after a spin-off-. * Stapled options (options cannot be separately exercised)-When exercised, these options entitle the holder to (1) a share of the continuing entity and (2) the same number of shares of the spun-off entity received by each owner of a continuing entity. * Nonstapled options (options can be separately exercised)-Entitle the holder to a separately exercisable option in the spun-off entity in addition to the option in the continuing entity. * Equity restructurings include spin-offs and recapitalizations in the form of special large and nonrecurring dividends. A spin-off can take one of two forms: * A corporation transfers a portion of its assets to a newly formed corporation in exchange for the latter's capital stock. The new corporation's capital stock then is distributed to the shareholders of the old corporation as a property dividend. * A parent corporation distributes the stock of an existing subsidiary to the shareholders of the parent. * Accounting issues. The three issues considered by the task force were 1. Do changes to a stock option plan resulting from an equity restructuring trigger a new measurement date? 2. If so, how would the additional compensation expense be measured? 3. Would an equity restructuring trigger a new measurement date if the fixed stock option grant already contains provisions for adjustments to the option terms in that event? Arguments: On the issue of whether changes to the plan due to the restructuring would result in a new measurement date, some link the need for a new measurement date with the effect of the plan adjustments on the option holder's economic position. One view is plan changes following a restructuring do nothing more than restore the option holder to the same economic position held prior to the restructuring. Proponents of this view see no substantive difference between these stock option adjustments and those made for stock dividends and stock splits. In practice, those equity transactions do not create a new measurement date. Others contend the economic position of the option holder has changed because a restructuring and simultaneous adjustment of existing stock options often create a different economic entity in which the option holder now has the opportunity to invest. …