SEC Office of Chief Accountant position on spring-loading and bullet-dodging

Cite this Article
Bill Sjostrom, SEC Office of Chief Accountant position on spring-loading and bullet-dodging, Truth on the Market (September 19, 2006),

The SEC Office of the Chief Accountant issued a letter today “summarizing the staff’s views regarding the accounting for stock options in the historical financial statements of public companies.” See here. The letter addresses a number of accounting issues concerning option backdating. It also has this to say about spring-loading and bullet-dodging:

H. Timing of Option Grants

Some companies appear to have engaged in techniques to select their award dates in coordination with the disclosure of information to the public. For example, a company may have granted stock options while it knew of material non-public information that was likely to result in an increase to the stock price [i.e., spring-loading]. Alternatively, a company may have delayed the grant of options until after material information that was expected to result in a decrease to the stock price was issued [i.e., bullet-dodging]. To the extent such practices were used, questions have been raised as to whether an adjustment would be necessary to the market price of the stock at the measurement date for the purpose of measuring compensation cost. Pursuant to paragraph 10(a) of Opinion 25, the staff believes that compensation cost must be computed on the measurement date by reference to the unadjusted market price of a share of stock of the same class that trades freely in an established market.

In other words, neither spring-loading nor bullet-dodging creates an accounting issue. Of course, the question of whether these practices constitute insider trading (my view is that they do not) or give rise to tax issues remains open.