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(Under APB 25, the accounting rule that was in effect until 2005, firms did not have to expense options at all unless they were in-the-money.
However, under the new FAS 123R, the expense is based on the fair market value on the grant date, such that even at-the-money options have to be expensed.) Because backdating is typically not reflected properly in earnings, some companies that have recently admitted to backdating of options have restated earnings for past years. The exercise price affects the basis that is used for estimating both the company's compensation expense for tax purposes and any capital gain for the option recipient.
The number of shares subject to option was 250,000 and the exercise price was (the trough in the stock price graph below.) Given a year-end price of , the intrinsic value of the options at the end of the year was (-) x 250,000 = ,750,000.
Most shareholder approved option plans prohibit in-the-money option grants (and thus, backdating to create in-the-money grants) by requiring that option exercise prices must be no less than the fair market value of the stock on the date when the grant decision is made. For example, because backdating is used to choose a grant date with a lower price than on the actual decision date, the options are effectively in-the-money on the decision date, and the reported earnings should be reduced for the fiscal year of the grant.
Five former executives at the companies have been charged with crimes.
Options allow recipients to buy stock at a preset exercise price, generally set at the market price on the day they were granted.
Karatz and Hirst cooperated with the internal investigation of options backdating, The Journal said, citing an unnamed person familiar with the matter and adding that Karatz, Hirst and Ray couldn't be reached for comment.
The stock-options scandal, which has now claimed the jobs of more than 50 executives and directors, The Journal said, and more than 130 companies, including KB Home, are under federal investigation in a wide government action.
Also leaving the Los Angeles-based residential construction company are Richard B.