SEC on Options: Your Results May Vary

Report says commission will grant leeway in the valuing of employee stock options.


When companies begin expensing the value of their stock options later this year, they will be given plenty of latitude in how they measure the value of those options. This, according to The Wall Street Journal, citing people familiar with guidance to be put out by the Securities and Exchange Commission.

Apparently, the SEC will emphasize the fact that different companies can take different approaches when valuing the employee stock grants. In fact, the office of the chief accountant is expected to state that one company might use a particular method to value options, while another company in a similar situation might take a different tack.

The commission’s much-anticipated bulletin, which may be issued as early as this week, is also expected to offer up ways to simplify the implementation of FASB’s rules governing stock options. The new expense calculations, which most companies must put into effect in their financial statements for the third quarter, have been criticized as being overly complicated. Hence, the bulletin’s flexibility will be widely welcomed by corporate managers, many of whom worry that off-the-mark initial valuations could trigger lawsuits.

Such optimism may be misguided, however. The Journal stressed that the SEC bulletin will not grant companies formal “safe-harbor” protection from future litigation arising from options valuation methodology.

The bulletin will probably address whether companies can make adjustments to their financial statements at the end of each quarter. The SEC also figures to include guidance on making assumptions about future stock-price volatility and the expected amount of time employees figure to take before exercising their options.

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