As Apple announced last week that it will likely restate past financial statements, the Wall Street Journal reviewed several stock options granted between 1997 and 2001 to its top executives just before the stock increased. Reuters summarized the WSJ article. Click here for the Reuters article.
For example, on January 17, 2001, four of Apple's top executives were granted a total of 8 million, split-adjusted options. After the market closed on that day, Apple released quarterly earnings. On the next day, Apple's shares climbed 11 percent, giving the four executives an instant paper profit of $7.5 million. Because options give the holder the right to buy the stock at a fixed price, the holder makes money when the stock goes up and thus far, all of the four executives have exercised some of their January 2001 options, collecting more than $100 million in total profits.
Until recently, accounting for the grant of options was governed by APB (Accounting Principles Board) Opinion No. 25, under which options issued as part of a compensation plan were not to be expensed so long as the exercise price was pegged at the fair market value of the underlying stock at the date of the grant (and thus there was an uncertainty whether the options had any "value"). This enabled a company to increase its profits.
Thus, as backdating of stock options creates various accounting problems, Apple will likely restate its past financial statements in order to record extra stock compensation expenses for options that were exercised in later years.
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