SEC Seeks To Clarify Accounting Treatment Of Employee Stock Options

by Mike Godfrey, Tax-News.com, Washington

27 December 2007

The Securities and Exchange Commission's Office of the Chief Accountant and Division of Corporation Finance on Friday released a new Staff Accounting Bulletin (SAB) that is intended to assist public companies in valuing stock option grants to their employees for income statement purposes.

As a result of new SAB 110, eligible public companies may continue to use a simplified method for estimating the expense of stock options if their own historical experience isn't sufficient to provide a reasonable basis.

Without this action, otherwise eligible public companies would have lost the option to use the simplified method as of Dec. 31, 2007, the SEC explained.

The limited extension of SAB 110 will be of particular benefit to those public companies that lack historical exercise data, many of which are smaller companies.

Giving more detail on the measure, the Commission announced that:

"Under the Financial Accounting Standard that requires the expensing of employee stock options, companies may rely on algorithms such as the widely used Black-Scholes-Merton pricing model to determine the amount of stock option compensation expense. The Black-Scholes-Merton model, as well as other models, require that the company be able to estimate the expected term of an option grant."

"For companies that don't have access to adequate historical data about employee exercise behavior in order to do this, the SEC issued a Staff Accounting Bulletin (SAB 107) in March 2005 that allowed them to use a simplified approach."

"Specifically, SAB 107 provided a simple rule for estimating the expected term of what it called a "plain vanilla" option: it would be just the average of the time to vesting and the full term of the option. Companies could use this simplified method until Dec. 31, 2007."

"The new assistance that is being issued today, SAB 110, extends the opportunity to use the simplified method beyond Dec. 31, 2007."

Statements in SABs are not rules or interpretations of the Commission, nor are they officially approved by the Commission. The statements represent interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.

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