Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Friday, December 21, 2007

SEC Extends Simplified Method for Valuing Stock Options

The SEC's Office of the Chief Accountant and Division of Corporation Finance today 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 set forth in SAB 107 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 limited extension in SAB 110 will be of particular benefit to those public companies that lack historical exercise data, many of which are smaller companies.

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.  As the Dec. 31, 2007 deadline in SAB 107 quickly approaches, however, the detailed information about exercise behavior that the staff contemplated is still not readily available. As a result, the staff will continue to accept use of the simplified method on an interim basis, provided a company concludes that its own historical share option exercise experience doesn't provide a reasonable basis for estimating expected term. Once relevant detailed external information about exercise behavior becomes widely available for companies to make more refined estimates of expected term, the staff will no longer accept use of the simplified method.

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