Basics: Valuation & Expensing
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Articles (Jump to FAQs)
Samuel D. Swisher
When should you exercise nonqualified stock options? You need a decision-making process that removes guesswork and emotions. Otherwise, you're likely to exercise too soon or too late.
Richard Friedman
Your company just gave you a stock option grant, or your existing options are underwater. You wonder: "What are my stock options worth? Are they worth anything at all?" Learn about different valuation methods, including Black-Scholes.
Keith Sellers, Yingping Huang, and Brett King
Journal of Accountancy
Three professors at the University of North Alabama explore the accurate valuation of stock options at private companies, and how this differs from valuation at public companies.
Michael Sullivan
American Venture Magazine, 1/15/07
Not all is bad because of changes in accounting rules brought by FAS 123(R). Stock option practices that once made little sense may now be worth while, including the repricing of options, the "net exercise" of options, and performance-based options.
BusinessWeek, 4/3/2006
Who has really won in the battle over stock option expensing? Certainly, the losers include the many ordinary professionals, engineers, and managers who hoped they too could cash in on the options boom.
Elizabeth MacDonald
Forbes, 1/18/06
Corporate profits are absorbing new hits from stock option expensing, the biggest accounting change in many years; yet Wall Street seems unperturbed.
Michelle Kessler
USA Today, 1/16/06
Stock option expensing has proved to be not as bad as the tech sector feared. Moreover, economists say there aren't yet any signs of a big pullback from stock option grants.
Nancy Nichols and Luis Betancourt
Journal of Accountancy, 3/06
Accounting for employee stock options requires knowing more than valuation methods and expensing rules. FAS 123(R) has implications for tax accounting as well.
Charles Baril, Luis Betancourt, and John Briggs
Journal of Accountancy, 12/05
Compare the major models used to value options at grant: Black-Scholes-Merton and lattice. If you're good at crunching numbers, you can build your own spreadsheet.
Jane Sasseen and Greg Hafkin
BusinessWeek Online, 7/24/06
Companies are finding ways to lower the costs and earnings charge of stock options under the new accounting rules of FAS 123(R), including the adjustment of valuation assumptions.
Mark Fuchs (Google's chief accountant)
Google Blog, 10/13/05
Make sense of the accounting numbers related to stock option expensing to prevent confusion about earnings.
Joseph D'Urso
The CPA Journal, July 2005
Looking to understand whether a lattice model will result in different employee stock option valuation? The author's Excel spreadsheet, which you can download, produces a standard binomial model.
Tim Eaton and Brian Prucyk
Journal of Accountancy, 4/05
All companies must account for stock-based compensation under FAS 123(R). The choice of option-valuation method affects the earnings charge and the potential changes to your stock grants.
Craig Schneider
CFO Magazine, 5/1/04
The Black-Scholes option-valuation model has a competitor in the binomial model for employee stock options. Both formulae are complex, are not for the math-shy, and do not reflect what you can sell your options for today.
Wharton School
Research shows that employees tend to misunderstand the basic economics of stock options. In many instances, a gap separates employees' valuation and what their options are theoretically worth.
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FAQs (Jump to articles)
Mathematical models for valuing stock options fit into two families: Black-Scholes and lattice. What these models try to value is the "option part" that gives you the ability to purchase the shares at a fixed priced for a set term. Although the models were developed for tradable listed options, with some modifications they can...
The value of an option consists of two elements: time premium and intrinsic value. Intrinsic value is the difference...
Expensing became mandatory for calendar-year companies at the beginning of 2006. This does not change the tax treatment of options. However, because companies take an earnings charge for the "fair value" of the option grant on their income statements, companies may change their grant practices by reducing the number of stock options, moving to grant more...
Let's begin with the "accounting reasons." Since January 1, 2006, every US company has had to recognize unvested stock options as...
Surveys show that rank-and-file employees and executives are likely to receive fewer stock options, or that grants will be made only at higher levels. In addition, the types of equity grants at companies have changed. A summary of data in surveys from 10 major consulting and research firms shows that...
Mandatory expensing started on January 1, 2006. Companies must recognize an earnings charge unless their ESPPs fit into the discount safe harbor rule. This has led companies to re-examine features of their ESPPs, including...
Companies are taking various approaches to modifying their ESPPs. Other than making no changes at all, they are considering (or are actually) reducing the discount, shortening the...
Stock options often cannot be exercised until they are vested, and then they are profitable only after...
The future value and its certainty depend on whether you are at a public or a private company. You determine the practical cash value of options in public companies by noting the...
If you are vested in your stock options and they are currently exercisable...
With variable grant guidelines, your company determines grant size according to a target dollar value rather than...
The calculation is simple. You multiply the number of shares you received by the...
Yes. For restricted stock whose vesting is based on the length of time you are employed...
Valuation of private-company options and stock is more an art than a science. You can ask...
If legal title to stock options is not being transferred under the divorce decree, the options are valued so that other property (e.g., cash or a house) can be awarded to the nonemployee-spouse...
When the net intrinsic value of the stock is zero, the attorney for the nonemployee-spouse has two ways to obtain...
Unvested options are not taxed or included in your estate. The value of any vested but unexercised stock options would be...
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