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SEC OKs use of a surrogate to value employee share options

  • SEC (US Securities and Exchange Commission) (dark gray) Image

25 Oct 2007

In a letter to Zions Bancorporation, SEC Chief Accountant Conrad Hewitt indicated that ESOARS ('employee stock option appreciation rights securities') are sufficiently designed to meet the measurement objective of FASB Statement No. 123(R) Share-Based Payment.

This means that companies issuing employee share options may be able to use ESOARS (or an acceptably designed alternative) in lieu of existing valuation techniques (such as the Black-Scholes-Merton formula or a binomial model) to determine the grant-date fair value of an employee share option, a value that is used, in turn, to determine compensation cost. IFRS 2 Share-based Payment has the same measurement objective as FAS 123(R), though the Chief Accountant's letter does not address IFRS 2.

ESOARS are derivative securities that are sold to investors. ESOARS are designed to (1) track the value of a referenced pool of employee share options (that is, there is no one-to-one correlation between the issuance of an employee share option and ESOARS), (2) pay investors as employee share options are exercised, (3) make payments to their investors on the basis of a pro rata share of the intrinsic value realized by employees upon exercise of their share options in the referenced pool, and (4) be priced, upon issuance, through a modified Dutch auction.

Click to download Heads Up Newsletter published by Deloitte & Touche LLP (USA) (PDF 117k) explaining the Chief Accountant's Letter (PDF 151k).


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