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What is Backdating?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 08 December 2016
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In finance, backdating is the strategy of issuing contracts for stock options that carry a later date than the date listed on the options. While not strictly illegal, this approach has come under increase scrutiny in recent years, since it can be used a means of presenting a false picture of the situation in order to obtain a more favorable tax position. There are legitimate uses of backdating that do not impact the tax burden at all, and may even be necessary as part of the overall acquisition process in some instances.

One of the ways in which backdating is recognized as a necessary process is when there is an extended issuance period involved with the acquisition of the stock options. When there is a longer procedure required to complete the transaction, there will be some difference between the date that the acquisition began and the date that it was completed. It is not unusual for the date that the acquisition was actually initiated to be used in the official records, rather than the date that the stock options were ultimately issued to the share holder. In effect, the contract is backdated to the beginning date of the process, rather than carrying the later date of issue.

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In some situations, backdating has been used in situations where there was no apparent need for an extended acquisition process. Instead, the backdating was performed as a means of obtaining a tax benefit that would not have been possible otherwise. While this process is still considered legal, there are some questions about the ethics of the use of backdating in this type of situation. Proponents of this application of the process point to the benefits that the issuing corporation can gain from stock option backdating, and the resulting favorable impact that it has on the economy, in terms of maintaining employee jobs and equitable salaries. Opponents tend to take the position that the use of backdating stock to gain a tax advantage ultimately hurts the economy more than it helps, and that stricter regulations governing the ability to backdate stock options should be implemented.

As a practice, backdating is common in just about every country around the world. This means the strategy does have an impact on every marketplace around the world. While the strategy may be necessary in situations where it takes longer to fully complete the acquisition of stock options, there is no doubt it is used in situations where the only reason for its use is to benefit the entity acquiring the options. Until the debate on the ethics of the use of this approach is resolved, this set of circumstances is not likely to change one way or the other.

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