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AFP Guide to Valuing Employee Stock Options Members: $79.00 Non-Members: $99.00 Format: Book Reserve A Copy Today Log-in required to reserve book. If you are not an AFP member or Registered User, you can register for free on the next screen.

Summary

"The AFP Guide to Valuing Employee Stock Options written by Daniel Abrams will help demystify the black box of employee stock option valuation. It's clear articulation of various valuation models and other option issues will improve the transparency of financial reporting. It provides financial statement preparers with tools and users with the ability to understand and assess a firms' valuation method."
- Thomas L. Porter, Ph.D., CPA, Senior NERA Consultant and Former FASB project manager and Research and Technical Activities Staff member.

WHO SHOULD READ THIS BOOK?

The guide is an aid for the corporate financial officer who has management authority on how share-based valuations affect compensation expense included in the financial statements. Some chapters are technical, while others provide more general explanations and decision making tools for managers who may not have the technical interest or background. The guide is also a useful tool for compensation committee board members who may need a reference book on stock options when establishing compensation packages. Auditors (both internal and external) will benefit from a stronger understanding of the components of stock options and their impact on the final results. Investors and other stakeholders can use it to deepen their understanding of the impact that non-cash share-based expenses have on the income statement and on stock ownership.
--John Rieger, Director of Financial Accounting and Reporting, AFP

ABOUT THE AUTHOR

Daniel Abrams, is a founder and managing partner of FAS123 Solutions, LLC, where he performs employee stock option valuation and equity compensation consulting for companies seeking compliance with FAS 123(R).  As a nationally recognized expert in this area, his clients include a range of entities from small-cap to Fortune 100.  He has provided technical advising to a member of the FASB Options Valuation Group (OVG).  He has published articles on employee stock options and been interviewed and quoted on the subject by the Financial Times, CFO magazine, Bloomberg, Corporate Finance Week, Risk Magazine, Compliance Week and Treasury and Risk Magazine.  He has given presentations on the subject at conferences including the AFP annual conference and the Securities Industry Institute at the Wharton School.

Abrams wrote the AFP Guide to Valuing Employee Stock Options while working as a Senior Consultant for NERA Economic Consulting, a Mercer, Inc. company.  He was previously a Senior Economist for the Law & Economics Consulting Group.  In addition to valuing options, his work over the past ten years has included valuing public and nonpublic companies, as well as business units and divisions of public companies.  He has valued a diversity of illiquid assets and liabilities, both marketable and non-marketable.  Related to his valuation work, he provides risk management advising.  This involves assessing the sources and magnitudes of companies’ potential financial exposures.  He has developed critical financial valuation solutions for some of the largest litigations in the insurance and financial sectors.

Abrams also worked as an analyst for IBM, and he was on the team that developed the first collateralized mortgage obligation information service at Trepp & Company.  He was a lecturer at the Cornell University Mathematics Department, teaching all levels of undergraduate mathematics.  He taught in the economics department and business school at Yale University, designing and teaching courses including mathematical economics offered to incoming doctoral students.

Abrams was trained in economics in the Yale University economics doctoral program and has graduate degrees in mathematics and computer science from Cornell University.  Questions or comments can be directed to the author through AFP by e-mailing: options@afponline.org.  The author also may be reached directly at daniel.abrams@fas123solutions.com or 800.760.5317.

ASK THE EXPERT
Questions about corporate valuations of employee stock options?  Contact the author, Daniel Abrams, through AFP at options@afponline.org

Excerpt

Model Comparison and Selection

"...The two broad modeling categories that comply with FASB standards are the closed-form models such as the modified Black-Scholes model, and the various numerical methods including lattices and simulation models. From the perspective of a company, or any party granting non-marketable options (e.g., an investment bank that writes and settles options for a company), the appropriate and most efficient framework for valuation consists of (i) a risk-neutral option valuation method and (ii) a mechanism to account for the option term uncertainty related to employees’ early exercise and forfeiture in the presence of non-marketability. Risk-neutral valuation depends on inputs that are largely observable - stock and strike prices, time to maturity, and risk-free rates of interest – and one input that is unobservable, future volatility...."

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