Underwater Option Exchanges: Financial Reporting Challenges

Takis Makridis

This White Paper reviews the financial reporting challenges associated with an underwater option exchange. These challenges include, but are not limited to, extensions to the vesting schedule and the treatment of incremental cost resulting from the modification. These challenges pose not only theoretical accounting questions but also systems difficulties.

While the financial reporting implications of an option exchange should not dictate how the exchange is structured, the implications should be well understood upfront and a process should be established for handling them.

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