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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: Exacctnt who wrote (102)	6/21/2002 2:15:38 PM
From: rkral	Read Replies (1) \| Respond to of 786

If the general opinion favors expensing to reign in excessive granting of options then higher expense methods such as using the difference between exercise price vs market when the option is exercised could be used. If the purpose of reform is to provide a useful estimate, then Black Scholes would be useful. Since you said "useful estimate", am I correct in assuming you would, of the two approaches, prefer the Black-Scholes approach? I understand that would mean all companies use the FAS 123 fair value method in GAAP statements, moving that method out of the footnotes. I believe the Black-Scholes result to be the equivalent of the call option price for options on the open market. Additional requirements for employee stock options are taken into consideration when estimating inputs, e.g., option life (vesting schedule, life shorter than contract term,etc.) and volatility. Not coincidentally, it is also the dollar expectation of the option, i.e, the intrinsic value at exercise discounted to the grant date. Black-Scholes does all that for us. In your opinion, would the Black-Scholes amount then be included to (a) account for the direct cost of the grant, or (b) to estimate the intrinsic value of the option when it is exercised? It's a subtle question, I know. For (a), recall that the option is granted (gifted) to the employee. The option price (aka, option premium) is never collected. Ron