Financial Reporting Compliance

SFAS 123R - Employee Stock Options and Equity Awards

Equity-Based Compensation

SFAS 123R requires that a company record the fair value of total employee benefit compensation awarded during a reporting period. For equity options issued by a publicly traded company, the analytical step required is to value the option itself, since the value of the underlying common stock is provided by the market. For private companies, the first step is to determine the fair market value of the common stock on the day of the award, using established valuation methodologies. While a valuation specialist may advise the Board of Directors as to the value of the awards, the Board must make its own determination of the value of compensation to be reported in its financial statements.

What to Expect

Our analysis begins with a valuation of the total capitalization (enterprise value) of the company. After allocating value through the capital structure, i.e. senior debt through the various categories of preferred and common securities and stock options, using Black-Scholes and other Option Pricing Models, the fair value of the awards is determined.

Timing

Our clients typically award stock options annually or semi-annually.