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To avoid having to pay higher taxes, many companies adopted a policy of issuing “at the money” stock options in lieu of additional income, with the idea that the executive or employee would benefit through the option by working to increase the value of the company without exceeding the one million dollar deductibility cap for executive income.
When company executives discovered that they had the ability to backdate stock option grants, thus making them both tax deductible and “in the money” on the date of actual issuance, the common practice of stock option backdating for financial gain began on a widespread level.
"The additional noncash stock-based compensation expense will not affect the company's current cash position or financial condition or previously reported revenues and will be offset by corresponding increases in additional paid-in capital, thus leaving shareholders' equity unaffected," the company said.
In early trading, Broadcom fell 29 cents, or 1%, to .60.
In September, Broadcom said it had identified additional stock-option grants whose measurement dates differed from those originally used to record them.
The backdating occurred from 2000 to 2002, Broadcom said.
To rectify the matter, Broadcom plans to take an additional options expense of more than 0 million and restate its previously filed financial statements. The practice piqued the interest of securities regulators who consider it an unsavory method of artificially maximizing compensation at shareholders' expense.
Broadcom's finding is the latest development in an ongoing review of options grants that began this year when evidence surfaced of widespread "backdating" among U. "No issues have been identified that affect equity awards issued to Broadcom's co-founders or CEOs or any member of the board of directors," Broadcom said.
Corporations, however, have defended the practice of stock option backdating with their legal right to issue options that are already in the money as they see fit, as well as the frequent occurrence in which a lengthy approval process is required.
In 1972, a new revision (APB 25) in accounting rules resulted in the ability of any company to avoid having to report executive incomes as an expense to their shareholders if the income resulted from an issuance of “at the money” stock options.Options backdating is the practice of altering the date a stock option was granted, to a usually earlier (but sometimes later) date at which the underlying stock price was lower.This is a way of repricing options to make them valuable or more valuable when the option "strike price" (the fixed price at which the owner of the option can purchase stock) is fixed to the stock price at the date the option was granted.Since the advent of stock option backdating, corporate policies have moved first toward a posture of encouraging backdating as a standard business practice, but then toward a posture of avoidance as public scandals emerged and investigations into fraudulent or dishonest business practices increased despite a commonly held belief that backdating was an acceptable and legal practice.