UnitedHealth Group (UNH) reported today that they were delaying their 10Q filing due to an options review. The company explained the situation in note 12 of their NT-10Q (replacement of their missing 10Q):
"This continued [options backdating] assessment includes the possibility that certain stock options may require variable accounting under APB 25, rather than fixed plan accounting as they were reflected in the then-current estimate of the maximum potential impact presented in Note 13 of the First Quarter 10-Q. Under variable accounting for these options, total stock option compensation expense is re-measured in each quarter based on the difference between the quoted market price of the stock and the stock option exercise price until the option is exercised. As the market price of the stock increases or decreases, non-cash compensation expense is adjusted and the increase or decrease is recognized over the remainder of the service period related to the options or in each quarter if the option has vested. If, upon conclusion of the independent review, the Company determines that variable accounting is the appropriate treatment for certain stock options, the resulting non-cash charges for 2005 and prior years are likely to be significant because of the substantial increase of the Company’s stock price during the period under review. Under FAS 123R, the accounting standard currently applicable to the Company (and adopted for all historical periods as disclosed in Note 1), the Company believes that the maximum potential impact of all stock option matters under review would not be significant."
So, the problem is determining how these stock options should be valued - with variable accounting or with fixed accounting. As you've read in their statement, variable accounting calls for the options prices to be recalculated each quarter. When a company's stock is rising quickly, variable accounting is the most timely/accurate way to calculate non-cash compensation expense. Fixed accounting can lead to these charges being underestimated, which is the cause for concern.
The non-cash charges mentioned in this statement are charges made by the company that do not require a cash outlay. Other examples of non-cash charges include depreciation, amortization, and depletion accounts. If the non-cash charges increased "substancially" in past years, this would result in lower earnings in the period when the charge was made - and lower earnings means a lower valuation. This is definitely a
stock to watch as UNH could quickly become a buy at a discount or become a potential short.