VALUING STOCK OPTIONS AND OTHER SHARE-BASED COMPENSATIONS
IF YOU GRANT ESOPS AN ACCURATE VALUATION OF THIS EXPENSE IS ESSENTIAL AND COULD POTENTIALLY REDUCE YOUR COSTS.
Whether your company prepares financial statements under USGAAP or International GAAP it is required that your company's compensation expense relating to share-based payments such as ESOP are recognized in financial statements.
As a result, an accurate valuation of this expense is of utmost importance to your company, and could potentially reduce your company's costs relating to share-based payments.
WHAT REGULATIONS RELATE TO SHARE-BASED COMPENSATIONS?
ASC 718 and IFRS 2 were enacted to curb abuses in executive compensation. These regulations require fair-value measurement and recognition of all equity-based compensation, including:
- Restricted stock
- Stock appreciation rights
- Performance shares
- Stock options
- ESPP
WHICH MODELS CAN BE USED?
ASC 718 and IFRS 2 do not prescribe the use of a specific option-pricing model but do require that companies use an option-pricing model that takes into account, at a minimum, the following six inputs:
- The exercise price of the option
- The expected term of the option
- The current price of the underlying share
- The expected volatility
- The expected dividends
- The risk-free interest rate(s) for the expected term of the option
The commonly accepted models are:
- Lattice - Binomial/Trinomial & Monte Carlo Simulations
- Black & Scholes
WHICH MODEL IS PREFERABLE?
Lattice models such as the Binomial model or Monte Carlo Simulations allows for the use of dynamic assumptions about interest rates, expected volatility, exercise behavior etc. unlike closed-form models such as Black & Scholes. FASB specifies that lattice models such as Monte-Carlo simulations are more flexible therefore provide a more accurate fair value of ESOs. Lattice models such as Monte-Carlo simulations should be used when certain conditions need to be considered such as:
- Vesting
- Options with performance conditions
- Stochastic volatility
- Post-vesting probability of forfeiture
- Sub-optimal exercise behavior
S-CUBE YOUR PREFERRED APPRAISER
S-cube can help select the most appropriate model and establish appropriate inputs into the valuation process, regarding such issues as lack of marketability, cost of capital, control/minority interest, etc.
With years of extensive experience S-cube's team of professional advisors has performed hundreds of valuations for both private and public companies. Our advisors hold the Accredited Valuation Analyst (AVA) designation by the NACVA. NACVA's AVA and CVA are the only NCCA-accredited valuation credentials. We have gained the trust and confidence of the "big four" accounting firms and the appreciation of hundreds of satisfied customers.
We offer the ultimate combination of professionalism together with experience and personalized service.
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