Simplified method stock options

Codification of Staff Accounting Bulletins - Topic Share-Based Payment

To play a Video Tutorial on this subject, click here. The "Expected Term" of a security is one of the valuation parameters required in the computation of the security's fair value. For a discussion of all required parameters, please refer to Valuation Parameters. Paragraph of the ASC paragraph A26 of the Statement sets forth the requirement to use Expected Term rather than contractual life as a parameter when measuring the fair value of an employee grant:.

What is Expected Term? - eShares Help Center

In addition, some employee share options contain prohibitions on exercise during blackout periods. Paragraph of the ASC paragraph A27 of the Statement provides the definition for Expected Term, with the pertinent part as follows:. For private companies, it is usually the grant date. Accordingly, the expected term covers the grant date through the date which the company expects the security to be either a exercised, or b settled in some other manner "settlement" may depend on the type of security involved.

The Statement goes on to set forth factors that can be used in determining expected term, including:. For a private company, the "exercise history" factor may not be available in sufficient numbers due to a lack of marketability in its shares.

Acknowledging the difficulty in obtaining information as to the exercise history of other companies, in March , the SEC responded to the need for an alternative expected term calculation methodology with ASC S SEC Materials Staff Accounting Bulletin , SAB The Interpretive Response to Question 6 of Sub-Section 2, Valuation Methods - Expected Term, of S SAB provides the "simplified" method for the expected term calculation for grants made to employees such grants are expensed and designated as "grant date grants" in CapMx and deemed to be "plain vanilla" per the following criteria:.

The SAB simplified formula: For the typical "1 year cliff then monthly for 3 years" vesting schedule, CapMx applies the same logic to each of the 37 vesting tranches, with a result of 5. See the calculation spreadsheet provided in On-Line Help for an exact calculation methodology pursuant to SAB By applying the formula across each vesting tranche, CapMx is able to effectively reduce the expected term to its lowest calculable figure. The expected term cannot be less than the vesting life of the grant, i.

Non-employee grants and grants that have performance vesting such grants are expensed and designated as "mark-to-market grants" in CapMx should not use the SAB simplified method calculation for expected term. In most cases the rules require the use of the full contractual life or remaining contractual life when determining the value of such options.

Based on the above restrictions of SAB , you must confer with your auditors or consultants on the calculation of expected term for your non-employee grants and performance vesting grants. Like the expected term, RCL cannot be less than the vesting life of the grant, i.

The RCL calculation is based on the a expense report period "ERP" , b the vesting dates that occur within that period, c the shares vesting on those vest dates, and d the expiration date for each grant.

The "end date" of the ERP i. Instead, by marking each Vest Date in the ERP along with the Grant Expiration Date as the calculation dates, the calculation concept is much like that of the SAB mid-point computation methodology.

SEC's “Simplified Method” for Estimating Stock Option Cost is Ripe for Manipulation - The Accounting Onion

By using each Vest Date as a computation value, the result is a weighted average that is quantifiable and non-biased. The optional search filter field "Measurement Type" allows you to narrow the search results based on certain characteristics as to the grant's origin:.

Reprice - an Original grant that is cancelled in connection with a repricing. In order to calculate the requisite incremental value to be expensed, such grant must have its Expected Term, Interest Rate and Volatility remeasured as of the date of cancellation.

Reprice - a grant that is issued as the result of a repricing.

In order to calculate the requisite incremental value to be expensed, such grant must have its Expected Term, Interest Rate and Volatility measured as of the date of issuance. Remaining Contractual Life - which should I use?

Which can I choose? The decision regarding which grants use SAB and which use RCL as the calculation methodology can be tricky to understand. Here is how it is handled: Remeasurement grants ; see the bottom grid "Calculation Spreadsheets" for more information on the calculations for both types.

All CapMx valuation parameter calculators key off of the Expensing Method attributed to the security.

Calculator - Expected Term / Remaining Contractual Life

Accordingly, Expensing Method is the only mandatory search field requiring completion to obtain search results. For securities where the fair value is measured as of the security's Grant Date.

This expensing method typically applies to securities issued to employees and outside board members whose grant is for board services, not consulting. For these securities, the Expected Term is calculated and applied only once, as of the security's grant date.

Although not mandatory, when the Expensing Method is Grant Date , it is suggested that you search using the From Date and To Date fields to obtain search results only for grants issued during that date range.

Doing so will narrow the search results and help to limit the instances of an Expected Term being applied erroneously to a security that already has an Expected Term. In the results below all of the grants returned in the search have a Measurement Type of "Original" even though the Measurement Type filter was left blank.

For securities where the fair value is re-measured at each reporting period during which the grant is a outstanding, and b vesting.

This expensing method typically applies to securities issued to non-employees or to grants with performance based vesting for both non-employees and employees. As the SAB document explicitly states that its Expected Term calculation method is only for grants to employees noted above in the Interpretive Response to Question 6 of Sub-Section D2 , the appropriate Expected Term for "Mark-to-Market" grants should be based on the contractual life of the grant.

However, in certain circumstances CapMx allows you to select SAB as the calculation method if you wish to do so. You must review the appropriate calculation method with your auditors. For grants whose fair value must be re-measured using the Expensing Method of Mark-to-Market , search using only the Report Period mandatory filter will give results of all grants that a are issued no later than the "To Date" of the Report Period selected, b have the Mark-to-Market attribute at the Security Expense Information screen, and c have not been cancelled on or before the "To Date" of the Report Period.

Remaining Contractual Life The attached Excel workbook has multiple worksheets. Please use the one appropriate to your expensing scenario.

Instead, it is a much simpler formula: Setting-up Security Expense Info.