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

To: rkral who wrote (119)	6/25/2002 2:07:57 PM
From: Biomaven	Read Replies (2) \| Respond to of 786

There are actually two different amortization methods available under FAS 123. The one you showed in your example is by far the less commonly used - most companies just use a modified straight line approach. (Modified in that if the vesting schedule is steeper than straight line, then so is the amortization). The actual expiration of the options is in 2010 But because options expire shortly after an optionee leaves the company, this is not a realistic expiration date - rather it is simply a maximum possible expiration date. The 78% of option price you are complaining about is what you get if you use the historical volatility of the stock as a guide to future volatility. That's the basic standard under FAS 123. Note that any grant-date based method of valuing options is inherently going to be "wrong" - it will understate what employees get if stocks rise and overstate it if stocks fall. FAS 123 allows for true-up for forfeitures prior to vest, but does not allow for true-up based on stock price or actual volatility. If you use an exercise-date approach (presumably estimated and trued-up each quarter as is done with variable accounting), then the numbers will be "correct" but the cost is that there will be huge short-term variability in earnings based on stock price moves. Would you really want to see companies with collapsing stock prices consequently reporting dramatically improved earnings? Let's see how many squawks you would get about fake accounting if that were to happen. Peter