Stock Compensation Accounting Rules May Require Compensation Accounting Charge For Discretionary Capitalization Adjustments Under Stock Plans

Members of leading accounting firms in the United States have recently advised companies that their stock compensation plans may need to be amended to avoid future accounting charges on outstanding stock awards in the event of capitalization or stock adjustments such as stock splits, spin-offs, and stock dividends. Depending on the current terms of their stock plans, companies granting stock-based awards may wish to amend their stock plans to avoid such accounting charges. However, care should be exercised in amending such stock plans to avoid unintended consequences.

Most existing compensatory stock plans include a provision providing that in the event of a capitalization adjustment – such as a stock split, a spin-off or a substantial stock dividend – the company’s board of directors or the administrator of the plans may or must adjust the number of shares subject to the outstanding stock awards and, if applicable, the