SEC approves market-based stock options model

BVWireIssue #53-1
February 7, 2007

The Securities and Exchange Commission has officially blessed a new method for valuing employee stock options using a market-based, auction approach from Zions Bancorporation. Employee Stock Option Appreciation Rights Securities or “ESOARS” may be “the best way to obtain the fair market value of employee stock options,” according to Zions executive vice president, in a report to To comply with FSAS 123R, “many companies—especially in the technology industry—complained existing methods such as Black-Scholes produced too high a value for options, and too big a hit to earnings.” But ESOARS may enable the financial services company to assess a lower value to its stock options.

How? As a public company, Zions Bancorporation “has the ability to conduct a public auction of their common stock options through ESOARS,” comments Neil Beaton (Grant Thornton, LLP). “Since ESOARS are traded in the open market, Zions is able to assess their value directly from market observations—and deriving values from third party market transactions is in line with the FASB’s hierarchy of value,” codified in FSAS 123R and elsewhere. “Public companies with the ability to issues ESOARS-like options will most likely be allowed to substitute their stock option pricing with external observations. Although the vast majority of private companies will still be forced to use a Black-Scholes or lattice model for their expense deductions,” Beaton says, “if enough public companies begin to issue ESOARS, the opportunity for entrepreneurial valuators to craft a methodology to value stock options based on market observations will rise.”

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