SEC Staff Clears Use of Market-Based Stock Option Valuation Method

The SEC Chief Accountant will allow a company to use the future issuance of employee stock option appreciation rights securities (ESOARS) as a market-based approach for valuing employee share-based payment awards under FASB Statement No. 123R. The SEC staff emphasized that each ESOARS auction must be analyzed to determine whether it results in an appropriate market pricing mechanism. The analysis should determine if the auction clearing price is representative of the fair valuation of the underlying employee share-based payments. Factors that should be considered in determining whether an auction was an appropriate market pricing mechanism include, but are not limited to, the size of the ESOARS offering relative to market demand and the number of bidders.

The letter to Zions Bancorporation was signed by Chief Accountant Conrad Hewitt. It is interesting that the chief accountant emphasized the advantages of the market-based over the model-based approach. For one thing, a market-based value can efficiently reflect a consensus view among informed marketplace participants about an expense, asset or liability's utility and future cash flows. In a press release, Zions said that, in addition to using ESOARS securities for its own FAS 123R stock option valuation, it intends to advise other public companies and facilitate their use of ESOARS for this purpose.