Presentation Date: Sunday August 2, 2009
  Presentation Time: 8:00 am-12:00 pm

CPE Session 36

Valuation of Employee Stock Options For Financial Reporting

Presented By:

Keith Sellers, University of North Alabama

Description: This course is designed to be a hands-on, in-depth study of critical aspects of SFAS 123R, Share Based Payment. SFAS 123R requires that all equity awards granted to employees be accounted for at “fair value.” The standard requires the use of cutting edge derivative valuation techniques but allows substantial leeway in critical measurements and judgments. The course will consist of the following:

1. Common features of employee stock options (ESO) will be outlined, along with their impact on option value.

2. Important technical aspects of SFAS 123R are discussed, with special emphasis on both model selection and key variable measurement under the guidance provided by the FASB and the SEC. Several examples of common ESOs will be valued using various models.

3. Based on our discussion of typical ESO features and authoritative guidance, we will demonstrate the construction of a binomial lattice model which is appropriate for the valuation of employee stock options.

4. Additional issues when valuing options for closely held companies are identified and addressed. We demonstrate that the value of common stock and all ESOs must be determined simultaneously.

5. Proper financial reporting and disclosure are addressed.

Field of Study: Accounting
Program Level: Basic

Intended Audience: This course should be of interest to anyone who teaches financial reporting. It should also be of interest to all professionals involved with financial reporting, especially financial statement preparers and auditors. The course also raises issues that should be of interest to researchers and standard setters.

Format/Structure: The course will consist primarily of Powerpoint presentation, explanation of SFAS 123R, and demonstration of option valuation models. Additionally, participants will have the opportunity to download several binomial lattice models which can be used to value employee stock options.

Learning Objective: • Understand the theories underlying SFAS 123R guidance. • Understand the strengths and weaknesses of SFAS 123R guidance. • Appreciate the difference between traded options and employee stock options (ESOs). • Understand key attributes of (ESOs) and the impact of each attribute on ESO value. • Truly understand and evaluate alternative option valuation models, as well as their underlying assumptions, strengths and weaknesses. • Understand how ESO grants impact firm value for both public and private companies. • Be able to determine if employee stock options (ESOs) have been mis-valued or if an option valuation model has been used inappropriately.

Prerequisites: None

Advanced Preparation Required: None

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