Current practice issue
Special dividends may impact accounting for share-based
compensation
In anticipation of higher individual income tax rates on
dividend income, some entities declared large special dividends in
the last quarter of 2012, which could impact the accounting for
share-based payments awarded by the granting entity.
In some instances, these special dividends are so large that
companies may adjust existing share-based payments arrangements to
equalize the value of those awards before and after the special
dividend. Typically the exercise price or number of shares or both
are adjusted. For example, a very large dividend might have a
significant impact on the fair value of an underlying share of
stock: If an option has an exercise price of $5 per share and the
fair value of an underlying share is $10 before the dividend and $7
after the dividend, the option holder would lose value if the
exercise price is not adjusted. Thus, some companies
