The “re-imagining” gimmick worked for Batman, in 2005. It worked for Superman earlier this year. Word is that it’s going to be applied to the original Star Trek franchise, too. (Ben Affleck as Mr. Spock? Just plain wrong, on soooo many levels.)
Taking its cue from the movies, it looks like UnitedHealth (NYSE:UNH) may be re-imagining its stock compensation as well.
In the whopping 8-K filed in conjunction with its investor conference, UnitedHealth supplies answers to some of the stock option questions investors have ached for. The results of their internal investigation by Wilmer Cutler Pickering Hale and Dorr are in, and they’re requesting “a consultation on certain interpretive issues with the SEC’s Office of the Chief Accountant.” What those interpretive issues might be aren’t clear - but if a firm revokes the reliability of its published financial statements from 1994 to 1996, you’d have to suspect that the number of financial statements to restate might be one of those issues you’d like to run by the SEC before you find out too late that you didn’t restate sufficiently far back. Continuing the movie analogy, that revocation effectively wipes out the old franchise, setting the stage for its “re-imagination.”
As for the amounts of the stock compensation to be revised:
“The Company analyzed the accounting impact under two methods: its former accounting method under APB 25, and its current accounting method under FAS 123R. Management estimates that the aggregate amount of pre-tax non-cash charges for stock-based compensation expense for the period 1994 – 2005 determined under APB 25, the Company’s former method of accounting, ranges from $1.5 billion to $1.7 billion.
On January 1, 2006, the Company adopted FAS 123R using the modified retrospective transition method, under which all prior period financial statements were restated to recognize compensation expense in the amounts historically disclosed under FAS 123. Under this current accounting method, management estimates that the aggregate amount of pre-tax non-cash charges for stock-based compensation expense ranges from $400 million to $600 million for the period 1994 – 2005 and from $25 million to $60 million for 2006.”
That’s where the bulk of the re-imagining comes in. If UnitedHealth restates all years from 1994 to 2005 with proper application of the compensation standard it chose to use during that period, the pre-tax compensation to be recognized is $1.5 billion to $1.7 billion. Presumably, it chose to use that method because it thought it could record less compensation expense than if it used the theoretically preferable method, Statement 123 and its sequel, 123R. (Yes, it’s a presumption. But that was pretty much the way stock compensation was considered by firms in that era.)
Now that the company has thoroughly vetted its option compensation practices for the period, it finds that its option compensation would be less under Statement 123R. Which one will it use?
The company was required to adopt Statement 123R on January 1, 2006. To its credit, the company elected to apply the modified retrospective method of adopting the standard, which would restate all periods presented in the financials as if 123R had been in effect. At that time, it’s doubtful that anyone considered that “restating all periods presented” would extend back to 1994. That wasn’t contemplated in the standard; now that the company might be facing that task, one wonders if they’ll go that route. And if the Office of the Chief Accountant will go for the idea.
One other interesting nugget from the company’s above disclosure: it says that the 1994 - 2005 pretax compensation under Statement 123R was in the range of $400 million to $600 million. Go back to the footnotes for the now-invalid 2005 10-K, to see what the unrecognized comp was under Statement 123 for just the prior three years: $160M in 2005, $132M in 2004, and $122M in 2003, for a total of $414 million aftertax compensation. Gross it up for a 35% assumed tax rate and you get a pretax figure of $637 million. That’s just for three years, not the entire period between 1994 and 2005. While Statement 123 and Statement 123R are different standards, the differences aren’t major in the areas of valuation and recognition. If UnitedHealth goes the route of re- imagining their performance for that period using Statement 123R, hopefully, they’ll have some really good disclosures about their calculations.