binomial lattice models, Black-Scholes, or Monte
Carlo simulations to value these options.
5 Themodelscanbeadjustedtoreflectthespecific
characteristicsofemployeeoptions,anda company
can use different option pricing models to value
differentoptiongrants.Inaddition,theoptionvalue
hasto beadjustedfor expectedforfeitures ofthese
options.
6- The value of the options can be spread over the
vestingperiod, starting with theyear ofthe grant.
Thus,anoptiongrantwithanestimatedvalueof$10
millionandafive-yearvestingperiodcanbespread
over the five years at $2 million a year.
7 As a consequence, theemployee optionexpense
line item for most firms will reflect not only the
portionofthegrantfromthatyear,butalsoportions
of option grants from previous years. - Iftheactualforfeiturerateisgreaterorlessthanthe
originalestimate(usedtovaluetheoptionsatgrant),
theoptionvaluehastobereestimatedinsubsequent
years andcompensationcostadjusted toreflectthe
changes.
8 - Ifoptiontermsaremodified,asisthecasewhenthe
exercisepriceisreset,thefirmhastorecognizethe
change in option value at the time of the
modification.
Undoubtedly, the rule will be revisited once firms begin
expensing options and run into real-world problems.
International Differences