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SAB 110 Commentary
Recently the SEC issued SAB 110 extending the SAB 107 shortcut method for estimating the expected term of “vanilla” options. Notwithstanding the extension, SAB 110 narrows usage of the shortcut method from a straightforward safe harbor to a facts-and-circumstances approach that requires justification. In brief, a company can no longer use the shortcut method for any specific option grant for which there is reasonable data available. Therefore, the shortcut method is only available (but is not required) for options granted by a company for which the company does not have reasonable historical data specifically for those options.
What are companies now doing to comply with SAB 110?
- Companies with some applicable historical data now need to analyze voluntary exercise and post-vest termination data to accurately estimate an expected term for the ongoing grants
- Companies with limited or no historical data face a choice: (a) Continue to use the shortcut method or (b) Use a method that relies in part or in total on comparable industry data
Why FAS123 Solutions strongly recommends choice (b) for any public company:
The short-cut method often overstates the expected term and hence the expense that a company recognizes for options. In contrast, by using whatever is available from a company’s own data in combination with voluntary exercise data from comparable companies in our large database consisting of over a million stock option grants from well over 100 public companies, we have successfully provided supportable and auditable expected terms that do not overstate the expense. Our clients include many companies with very limited data including new IPOs. The advantages of our approach include:
- Use of all available historical data
- Flexibility to allow for new grants with different vesting schedules and contract terms than used historically
- Applicability to non-vanilla options
- Easily adapted to modifications and other mark-to-market valuations
- Objective and auditable
You only pay if our work passes audit:
FAS123 Solutions has a record of 100% success rate in valuation work passing audit for our clients. With over 150 satisfied clients (from Fortune 50 to small cap), we have excellent relationships and great credibility with the major accounting firms and the stock plan administration industry.
FAS123 Solutions is among the leading providers in the field of equity valuation and advisory. We are happy to provide references, so please give us a call or email us to discuss your particular needs.
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