Option123 LLC is a leading provider of employee stock option administration, valuation software and valuation services in the United
States. Our software has been used by 400+ customers worldwide, including Fortune 500 companies, large CPA firms (such as big 4),
as well as many small to mid-sized businesses since it was found in 1999.
With our excellence on Microsoft Excel VBA and macros, we also provide the state of the art solutions to options related issues that may
be consider challenging on Microsoft Excel(R) for accountants, financial professionals and business managers.
Simple solutions for financial professionals on
complicated option valuations and beyond...
Valuation, & Reporting of
|as easy as
|Select proper modelPer FAS123 (R)||
|Terms are subject to change
without prior written notices.
Contact us via Email:
(c) 1999-2013 Option123,
LLC. All Rights Reserved.
What We Do?
“Option123 (Excel). v. 6.0”, standard version, and "OptionX", online version, (hereafter, “Option123” or the “Program”) is designed to
assist companies in tracking and valuing employee stock options plan, as well as computing earnings per share and preparing both
the interim report, Form 10 Q, and the annual report, Form 10 K, by following the Statement of Financial Accounting Standards No. 123
(Revised 2004), “Share-Based Payment” (FAS 123 (R), (superseded by FASB ASC Topic 718 - Stock Compensation), the Financial
Accounting Standards No. 128, “Earnings per Share” (FAS 128), the Financial Accounting Standards No. 148, “Accounting for Stock-
Based Compensation—Transition and Disclosure—an amendment of FASB Statement No. 123” (FAS 148), as well as the Securities
Exchange Act of 1934.
Besides assisting companies track their equity plans, “Option123” automates:
- Computations of fair value of stock option by using option pricing model (including “Binomial Model” and “Black-Scholes Option
Pricing Model”) – computes the fair value of the options or similar awards based on your company’s input assumptions. Fair
values of each grant are calculated by using both Binomial Model and Black-Scholes Option Pricing Model at the same time, if
all required inputs are entered. Binomial tree simulation can be done for each single grant with either constant inputs used over
the entire term or variable inputs entered separately at each node. Historical volatility is also calculated at the same time, if so
- EPS calculations – computes the incremental shares and EPS by following ASC 718 or FAS 123 (R) and FAS 128.
- Disclosure and option grant information – provides minimum disclosure information and option grant information, as required
by ASC718 or FAS 123 (R), SEC, to file Form 10K, Annual Report. This includes summary information of outstanding /
exercisable options, weighted average information, the Aggregate option grant information as required in Form 10 K, Part II, Item
5, as well as the information relating to the executive compensations required in Form 10K, Item 11. For companies using
calendar year as fiscal year, they are required to adopt FAS 123 (R) or ASC 718 at the beginning of the interim fiscal period
beginning after December 15, 2005. Prior to that, pro forma disclosure is still required for those who have not adopted FAS 123
(R) or ASC 718.
- Sensitivity Analysis – provides for each single grant with sensitivity analysis by assuming these changes: stock price of
underlying assets, volatility, estimated life of option, and risk-free rate by calculating the following 5 Greeks: Delta, Gamma,
Vega, Theta, and Rho at the same time when fair value is computed for each grant. Detail explanations of these Greeks are
provided in detail in later chapter.
- Expense Allocation – allocates the total expense associated with an individual award to the proper accounting periods, and
adds individual award allocations by group to assist companies in developing ASC 718 or FAS 123 (R) net income disclosures.
It also presents the weighted average information and other disclosure required by ASC 718 or FAS 123 (R) and FAS 148.
- Automatic Downloading Historical Stock Price and Dividend Date – allows historical stock price and dividend data automatically
downloaded from the Internet.
Overview of Employee Stock Option and Option123
“Option123” provides companies with a simplified package to manage their equity plans. It keeps all the required information to record
all activities related to options, warrants, or similar awards, including grants, cancellations/forfeitures, exercises, expirations,
valuations, diluted EPS computations, disclosure and reporting of all options related compensations.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, “Earnings per Share”, which
simplifies the standards for calculations. It requires the dual presentation of basic and diluted EPS on the face of the income statement
and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator of the diluted EPS
computation. The Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—
an amendment of FASB Statement No. 123”, also amends the disclosure requirements of FAS 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for stock-based employees compensation and the effect
of the method based on reported results. Further, the Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-
Based Payment” (FAS 123 (R)), amends EPS calculations of FAS 123, FAS 128, and FAS 148. FAS 123 R has been superseded by
FASB ASC Topic 718 - Stock Compensation.
Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities, including stock options, warrants,
convertible debt, and convertible preferred stock. Option123 only deals with dilutive options / warrants and does not refer to convertible
debts and convertible preferred stock due their specific natures. Also because of its relative simple method of computation, Option123
does not deal with the calculations of basic average number of common shares outstanding and basic EPS.
Diluted EPS measures the performance of an entity over the reporting period when giving effects to all potential commons shares that
were dilutive and outstanding during the period. The denominator includes the number of additional common shares that would have
been outstanding if the potential common shares that were dilutive have been issued.
Stock options affect diluted EPS is dependent on the vesting provisions. Plans that are subject to performance-based vesting
provisions or any additional vesting criteria other than continued service or time-related vesting are treated as contingently issuable
shares. Awards that are subject only to time-related vesting are treated similar to options using treasury stock method (see next page).
However, the calculation is different depending on the accounting method selected by the company to account for awards granted to
employees. The EPS guidance applicable to FAS 128 should be applied in calculating the EPS for reporting on the face of income
statements required by ASC 718 or FAS 123 (R).
The dilutive effect of outstanding options and warrants issued by an entity generally should be reported in diluted EPS by application of
the treasury method. Options and warrants will have a dilutive effect under the treasury stock method only when the average price of the
common stock during the reporting period exceeds the exercise price the options or warrants (in-the-money). If in a quarter the
average price increases above the option’s exercise price, previously reported EPS data should not be retroactively adjusted as a result
of changes in market prices of common stock.
Dilutive options or warrants that are issued during the reporting period or that expire or are cancelled or exercised during the reporting
period are included in the denominator of diluted EPS for the actual period that they are outstanding.
Under the treasury method, all options or warrants in the money are assumed to be exercised at the beginning of the reporting period
(or at the time of issuance, if later). The proceeds from exercise should be assumed to be used to purchase common stock at the
average market price during the period. The difference between the numbers of shares assumed issued and the number of shares
assumed purchased, called the incremental shares, should be included in the denominator of the diluted EPS calculations.
Under “Option123”, the average market price is simple average price of daily stock price which may be the opening, closing, highest,
lowest, open-close average, or hi-lo average stock price, which completely at the user’s discretion. However, “Option123” only
automates the awards where vesting is based on the passage of time. For calculation of non-vested stock, contingently issuable
shares, or awards that may be settled in stock or cash, thus separate calculation is necessary. Please refer to SFAS 128.
Quarterly diluted EPS is calculated using the average stock price during the three months in the reporting period. If there was a loss in
a reporting quarter, no incremental shares should be included in the diluted EPS computations because the effect would be anti-
dilutive. For year-to-date and annual computations when each quarter is profitable, the incremental shares included in the denominator
are the simple average number of incremental shares in each quarter in the year-to-date or annual period. However, if one or more
quarters have a loss, the year-to-date and annual income (or loss) from continuing operations should be used in determining whether
in-the-money operations or warrants are included in the denominator. Therefore, even though in-the-money options or warrants were
excluded from one or more quarters for computing quarterly diluted EPS due to the effect of anti-dilution, those stock options or
warrants should be included in year-to-date or annual diluted EPS computations as long as the effect is dilutive.
“Option123” provides two methods to calculate year-to-date EPS: one using the simple average of interim periods (quarters), and the
other using the year-to-date weighted average with beginning date always starts at first day of the fiscal year.
There are two option pricing models available in this Program: Binomial Option Pricing Model and Black-Scholes Option Pricing Model.
Per ASC 718 or FAS 123 (R), either model is acceptable although the latest Exposure Draft of Share-Based Payment – an Amendment
of FASB Statements No. 123 and 95 mentioned the FASB’s preference to Binomial Option Pricing Model, as it offers the greater
flexibility needed to reflect the unique characteristics of employee share options and similar instruments. However, However, the FASB
understands that entities may not have available in a usable format information about employees’ exercise patterns (and perhaps
other factors) needed to provide appropriate input to those models. The Program uses “Binomial Option Pricing Model” by default, but
you may choose to use “Black-Scholes Option Pricing Model”.
Binomial Model, also called Lattice Model or Tree Model, was first introduced by Cox, Ross, and Rubinstein to price American
stock options in 1979. The model divides the time to an option’s expiry into a large number of intervals, or steps. At each step it
computes that the stock price will move either up or down with a given probability. This model also takes into considerations of
the underlying stock’s volatility, the time to expiration, the risk free interest rate and dividend amount/yield.
The main difference between American options and European options is the feature of early exercise at any time during the
American option’s life. However, this feature brings substantial complexity for valuation purpose. Unlike Black-Scholes Option
Pricing Model, a closed-form pricing model for valuation of European options, there are no general closed-form model for
For European options or similar awards, the Binomial model used in the Program are the basic form using the six variables
required by ASC 718 or FAS 123 (R):
- Stock price,
- Exercise price,
- Expected term, a calculated result with contract term as an input in the Binomial model,
- Expected volatility of the underlying stock over the contract term,
- Risk free interest rate over the contract term, and
- The expected dividend yield over the contract term.
Under the binomial model, expected life is a calculated output of a closed-form model, i.e. Black-Scholes Model in which the
expected term is an input.
An example of an acceptable method for purposes of financial statement disclosures of estimating the expected term based on
the results of a lattice model is to use the lattice model’s estimated fair value of a share option as an input to a closed-form
model, and then to solve the closed-form model for the expected term. Other methods also are available to estimate expected
Under binomial mode, another decision that must be made is how many time steps to use in the valuation (i.e., how much time
passes between nodes). The number of steps can be unlimited theoretically since the stock price movements can be infinite for
a future period. Generally, the greater the number of time steps, the more accurate the ending value. However, as more time
steps are added, the incremental increase in accuracy declines. The number of time steps takes on more importance in a
robust lattice model in which more time steps may be needed to adequately model the term structures of volatilities and interest
rates, as well as employee-exercise behavior.
For American options or similar awards, two more inputs may be entered:
- Suboptimal factor and
- Post-vesting termination rate.
For example, a suboptimal exercise factor of “2” means that exercise is generally expected to occur when the share price
reaches two times the share option’s exercise price. Option-pricing theory generally holds that the optimal (or profit-maximizing)
time to exercise an option is at the end of the option’s term; therefore, if an option is exercised prior to the end of its term, that
exercise is referred to as suboptimal. Suboptimal exercise also is referred to as early exercise. Suboptimal or early exercise
affects the expected term of an option.
Regardless of the valuation technique or model selected, an entity shall develop reasonable and supportable estimates for
each assumption used in the model, including the employee share option or similar instrument’s expected term, taking into
account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment
“Option123” provides two choices to enter all the inputs under the Binomial model: constant inputs over the contract term and
variable inputs to be entered at each node during the contract term.
- If constant inputs are selected, the assumptions for each input will be used for the entire term in Binomial valuation.
- If variable inputs assumption is selected in this Program, except Exercise Price and Stock Price of underlying assets, all
other inputs may be entered differently at each node over the term. As indicated in the diagram below, the input for risk
free rate, dividend yield, expected volatility, and the termination rate are entered at each node,
In the early 1970s, Fischer Black and Myron Scholes made a major breakthrough by deriving a differential equation that must be
by the price of any derivative dependent on a non-dividend-paying stock. They used the equation to compute values for
European call and put option on the stock. In 1997, they were awarded Noble Prize.
To compute the value of stock options by using Black-Scholes Option Pricing Model, five inputs are needed: stock price,
exercise price, risk-free rate, time to expiration date, and volatility. Black-Scholes Generalized Model has one more assumption:
expected dividend yield - a company paying a continuous dividend during the life of option. According to ASC 718, FAS 123 R, or
FAS123, six inputs are needed to compute the fair value of options. Black-Scholes Generalized Model is used in “Option123” to
compute the fair value of option for public companies and the minimum value of options for non-public companies.
Black-Scholes Option Pricing Model is the most frequently mentioned theoretical model for valuation of options in business
world. The standard Black-Scholes Option Pricing Model was designed to estimate the value of transferable stock options.
While the model has been used by investors and compensation professionals, it has also gained greater prominence because
of its acceptability as a valuation model by the FASB and in the SEC proxy rules. This model originally was developed to value
tradable types of options, but the FASB also believes its use is appropriate for valuing employee stock options.
Per ASC 718 or FAS 123 (R), if an observable market price is not available for a share option or similar instrument with the same or
similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets
the requirements and takes into account, at a minimum:
- The exercise price of the option.
- The expected term of the option, taking into account both the contractual term of the option and the effects of employees’
expected exercise and post-vesting employment termination behavior. In a closed-form model, the expected term is an
assumption used in (or input to) the model, while in a lattice model, the expected term is an output of the model.
- The current price of the underlying share.
- The expected volatility of the price of the underlying share for the expected term of the option.
- The expected dividends on the underlying share for the expected term of the option.
- The risk-free interest rate(s) for the expected term of the option.
Under “Option123”, fair value of stock based options is determined by either using “Black-Scholes Option Pricing Model” or “Binomial
Model” that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. If Binomial model is
used, suboptimal factor, post-vesting termination rate and number of steps may be entered as additional inputs.
The required inputs for valuing stock based options are presented on “Value” worksheet. However, no fair values can be computed
until all assumptions have been made on “Front Page”, all minimum inputs are entered on “Value” or “Tree” sheet, and all price data
have been downloaded onto price worksheets.
Two of the six required inputs designated by the FASB are relatively straightforward and are consistently applied for all companies. The
“Stock Price” at the date of grant and “Exercise Price” general are obvious. “Exercise price” may also be named as “strike price” or
“grant price”. They are all interchangeable in the Manual.
Per ASC 718 or FAS 123 (R), a volatility input is always necessary for valuating a stock-based award with either Binomial Model or
Black-Scholes Option Pricing Model. Out of the six inputs required by these two option pricing models, volatility is the most difficult to
Volatility is a measure of the amount by which a stock price has fluctuated or is expected to fluctuate during a given period of time. As is
generally the case, materiality should be considered when establishing the degree of precision necessary for this estimate. Volatility is
not a stock’s "beta" factor. The beta factor measures a stock’s price fluctuation relative to the market average fluctuation, whereas
volatility is a measure of a stock’s own price change relative to a prior period.
“Option123” automatically calculates volatility based on historical stock price (daily, weekly or monthly) and the expected life of option. If
you choose not to use the calculated historical volatility, you may also input the estimated volatility manually on the “Value” worksheet.
The calculation of the historical volatility is built-in the Program. Once you enter the price data onto the related price worksheet and
estimate the expected life of option on “Value” worksheet, volatility over the historical period with length equals to the expected life of
option will be computed and displayed on the “Value” worksheet after you click “Calculate Values” button.
The FAS123 recommends using at least 20-30 pricing observations, and preferably more, to compute a statistically valid measure. If
the observations, defined based on the expected life of option and the time-interval used to calculate volatility, are less than 20, the
Program will remind you of it. You may continue to calculate fair value / volatility for a grant item, even the observations are fewer than
20, as long as the calculation is mathematically computable (i.e. the observations are greater or equal to 3).
The FASB requires the fair value estimation of the award to be based on expected volatility over the expected life of the option.
Therefore, if volatility based on historical price fluctuations is not representative of the volatility expected over the expected life of the
option, adjustments to the historical volatility may be necessary. The reasons behind any deviation from historical volatility should be
For an entity whose common stock has recently become publicly traded (and in certain other cases), sufficient historical data may not
be available to calculate volatility. In those situations, expected volatility may be based on the average volatility of similar entities at
comparable levels in their history.
Similarly, an entity whose common stock has been publicly traded for only a few years generally becomes less volatile as more trading
experience has been gained and, therefore, might appropriately place more weight on recent experience. An entity also might consider
the stock price volatility of similar entities.
In addition, periods containing nonrecurring events that clearly cause abnormal effects on the calculation of historical volatility (such as
a failed takeover bid or an isolated major restructuring) might be disregarded for that historical calculation.
The FASB acknowledges that a range of reasonable volatility expectations may exist. If one amount within that range is a better
estimate than any other amount, it should be used. Otherwise, it is appropriate to use an expected volatility estimate at the low end of
that reasonable range.
In “Option123”, the summary assumptions used for volatility calculation are presented on the top of “Price History”, “Weekly Price”, or
“Monthly Price” worksheet, depending on the type of price you selected on “Front Page”. However, you may not manipulate the historical
volatility calculations on any of the price worksheets.
FASB suggests that price observations should be consistent at regular intervals (i.e. daily, weekly, monthly, etc.), thus it should not be
change it in the future once you select the proper time-interval on “Front Page”, unless other intervals provide better estimate.
Therefore, the only alternative to manipulate historical volatility calculation is to change the “expected life of option” on “Value”
The expected life of option is the number of years expected to elapse before the grantees exercise the options, SARs payable in
shares, or similar equity awards. As is generally the case, materiality should be considered when establishing the degree of precision
necessary for this estimate. Expected life is less than the contractual term, but is always at least as long as the vesting period.
The expected life is based on several factors, including the company's past experience with similar awards, the vesting period of the
award, the volatility of the underlying stock, and current expectations. Also, when estimating the expected option life, it may be helpful to
stratify the grantees if there is likely to be a significant difference in their option exercise behavior.
The following factors to consider when estimating the expected term of an option:
- The vesting period of the award.
- Employees’ historical exercise and post-vesting employment termination behavior for similar grants.
- The expected volatility of the stock.
- Blackout periods and other coexisting arrangements such as agreements that allow for exercise to automatically occur during
blackout periods if certain conditions are satisfied.
- Employees’ ages, lengths of service, and home jurisdictions (i.e., domestic or foreign).
- External data, if it is more appropriate or internal data is not available.
- Aggregation by homogeneous employee groups.
If Binomial model is selected in Option123, the expected term is automatically calculated using Black-Scholes model. However, if the
expected volatility is too higher, say greater than 150% in some case, the calculated expected term may not be reasonable and the
Program may replace it with contract term instead.
This is the expected annual dividend yield over the expected life of the option, expressed as a percentage of the stock price on the date
of grant. As is generally the case, materiality should be considered when establishing the degree of precision necessary for this
Estimating expected dividends over the expected term of the option requires judgment. ASC 718 or FAS 123 (R) provides the following
guidance on estimating expected dividends:
Option-pricing models generally call for expected dividend yield as an assumption. However, the models may be modified to use an
expected dividend amount rather than a yield. An entity may use either its expected yield or its expected payments. Additionally, an entity’
s historical pattern of dividend increases (or decreases) should be considered. For example, if an entity has historically increased
dividends by approximately 3 percent per year, its estimated share option value should not be based on a fixed dividend amount
throughout the share option’s expected term. As with other assumptions in an option-pricing model, an entity should use the expected
dividends that would likely be reflected in an amount at which the option would be exchanged.
If an entity has a past history of increases in dividends that is reasonably expected to continue in the future, the current dividend yield
should be modified to reflect that expectation. If an entity has not paid dividends in the past but has announced it will begin paying
dividends representing a certain yield that should be used as the expected dividend yield.
Adjustments to reflect expected changes from a current dividend yield generally should be based on publicly available information.
However, some latitude is allowed, and if an emerging entity with no history of paying dividends reasonably expects to declare
dividends during the expected life of the option, it might consider the dividend payments of a comparable peer group in determining its
expected dividend assumption, weighted to reflect the period during which dividends are expected to be paid. If dividend equivalents
are paid to the grantee or are applied to reduce the exercise price, a dividend yield of zero should be used.
Expected Dividends under Binomial Model. Binomial model can be adapted to use an expected dividend amount rather than a yield
and, therefore, can also take into account the impact of anticipated dividend changes. In Option123, if “variable inputs” method is
selected, expected dividend may be entered differently at each node over the entire contract term. Such approaches might better reflect
expected future dividends, as dividends do not always move in lock-step with changes in the company’s stock price. Expected dividend
estimates in a lattice model should be determined based on the general guidance provided above.
The FASB acknowledges that a range of reasonable expectations as to dividend yield may exist. If one amount within that range is a
better estimate than any other amount, it should be used. Otherwise, it is appropriate to use an estimate at the high end of that
reasonable range for the expected dividend yield (which, because of its inverse relationship, would result in the lowest reasonable fair
In “Option123”, the dividend amount entered on “Price History”, “Weekly Price”, or “Monthly Price” worksheet is used for volatility
calculation, while the “Annual Dividend Yield” entered on “Value” worksheet is used to compute the fair value of stock-based options.
Variable dividend yields are to be entered on “Tree” worksheet.
For a U.S. employer, the risk-free interest rate is the rate currently available for zero-coupon U.S. Government issues with a remaining
term equal to the expected life of the options. In a cash option, the assumed risk-free interest rate (discount rate) represents the return
on the cash that will not be paid until exercise.
Risk-Free Interest Rate under Binomial Model. If “variable” risk free rates are to be used under Binomial Model in Option123, a U.S.
entity issuing an option on its own shares must use implied yields from the U.S. Treasury zero-coupon yield curve over the expected
term of the option as its risk-free interest rate assumption if it is using a lattice model incorporating the option’s contractual term. That
is, at each node in the lattice, the company would use the forward rate starting on the date of the node, with a term equal to the period
until the next node. Such inputs need to be entered on “Tree” worksheet in Option123.
For your “reference” to the risk free rate, the U.S. Treasury Securities interest rate data is provided on “Risk Free Rate” worksheet
Periodical update is necessary and available on our web-site (www.option123.com/customers) if you want to use the provided data as
risk free rate.
For awards that vest on a “cliff” basis, i.e., all at once), the expense would be recognized on a straight-line basis over the vesting period.
If different portions of the overall award vest at different dates, this is called “graded” vesting. For options with graded vesting,
companies should consider separating the grants into portions based on their vesting terms because in some cases the expected
option lives of each portion could differ significantly.
Per ASC 718 or FAS 123 (R), for an award with ONLY Service condition that has graded vesting schedule, an entity may decide to
recognize compensation cost:
(a) on a straight-line basis as if the award was, in-substance, multiple awards or
(b) on a straight-line basis over the requisite service period for the entire award.
However, per ASC 718 or FAS 123 (R), “the amount of compensation cost recognized at any date must at least equal the portion of the
grant-date value of the award that is vested at that date.”
The choice of attribution method is an accounting policy decision that should be applied consistently to all share-based payments
subject to graded service vesting. However, this choice does not extend to awards that are subject to performance vesting. The
compensation cost for each vesting tranche in an award subject to performance vesting must be recognized ratably from the service
inception date to the vesting date for each tranche.
In “Option123”, the awards with graded vesting schedules are still recorded as multiple grant items, instead of just on grant item, but
you can choose to recognize compensation cost either by (a) or (b).
If the first tranche is vested immediately on the grant date, the above straight-line attribution method can not be applied as it does not
meet the requirement of ASC 718 or FAS 123 (R), because the amount of compensation cost recognized at the grant date, practically
$0 or 0%, does NOT equal the portion of the grant-date value of the award, 25%, that is vested at that date.
- Accounting and Expense Allocation
Under ASC 718 or FAS 123 R, expense is recognized only for options that ultimately are vested. Compensation expense is not
recognized for options that are forfeited because grantees fail to fulfill service requirement. Therefore, while the fair value per option
would not be re measured, the number of options actually vesting may change, and this would require re-measurement of aggregate
compensation expense. Compensation expense is not reversed for options that expire unexercised, even if the options turn out to be
worthless because the stock price declined.
In “Option123”, the expense allocation calculates the aggregate value of the total award and allocates it over the vesting period.
Under ASC 718 or FAS 123 R, if options are not ultimately vested, no compensation cost should be recognized – all expense
recognized previously should be reversed. However, Per FAS 123 (R), regardless the nature and numbers of conditions that must be
satisfied, the existence of a market condition requires recognition of compensation cost if the requisite service is rendered, even if the
market condition is never satisfied.
When recognizing compensation cost under ASC 718, FAS 123 R, or FAS 123, two methods of accounting are allowed for forfeitures
related to continuing employment: "Estimated" and "Actual". An employer could elect to estimate forfeitures or could recognize
compensation cost assuming all awards will vest and reverse recognized compensation cost for forfeited awards when the awards are
actually forfeited. However, FAS 123 (R) eliminates the latter accounting alternative and requires that employers estimate forfeitures
(resulting from the failure to satisfy service or performance conditions) when recognizing compensation cost.
Those estimates must be evaluated each reporting period and adjusted, if necessary, by recognizing the cumulative effect of the
change in estimate on compensation cost recognized in prior periods (to adjust the compensation cost recognized to date to the
amount that would have been recognized if the new estimate of forfeitures had been used since the grant date).
An employer’s estimate of forfeitures should be adjusted as actual forfeitures differ from its estimates, resulting in the recognition of
compensation cost only for those awards that actually vest.
In “Option123”, the initial forfeiture is entered on “Basic Info” worksheet, and the compensation cost then is recognized over the
requisite service period, net of initial estimated forfeiture. Estimation adjustment and Actual forfeiture/cancellation are entered
differently in “Option123”:
• All adjustments to initial estimation or prior estimation can be done “Exp Sum” worksheet.
• All actual forfeiture needs to be entered on “Basic Info” in order to report actual forfeiture properly.
However, you may always enter both estimation adjustment and actual forfeiture/cancellation on “Basic Info” worksheet. All forfeitures,
including initial estimation, estimation adjustment, and actual forfeiture, are either entered or transferred onto “Exp Sum” worksheet.
When performance targets also exist, companies must make a best estimate of the number of awards expected to be earned based
on attainment of the target. If the company elects the estimated forfeitures method for continued employment, a further estimate must
be made for awards that will be forfeited based on continued employment.
Similar to the requirements of ASC 718, FAS 123, or FAS 123 (R) requires that the income tax effects of share-based payments be
recognized for financial reporting purposes only if such awards would result in deductions on the company’s income tax return.
Generally, the amount of income tax benefit recognized in any period is equal to the amount of compensation cost recognized
multiplied by the employer’s statutory tax rate. An offsetting deferred tax asset also is recognized.
If the tax deduction reflected on the company’s income tax return for an award (generally at option exercise or share vesting) exceeds
the cumulative amount of compensation cost recognized in the financial statements for that award, the excess tax benefit is recognized
as an increase to additional paid-in capital.
Alternatively, the tax deduction reported in the tax return may be less than the cumulative compensation cost recognized for financial
reporting purposes. The deferred tax asset in excess of the benefit of the tax deduction needs to be written-off:
1. In equity to the extent that additional paid-in capital has been recognized (“APIC credits”) for excess tax deductions from
previous employee share-based payments accounted for under ASC 718 or FAS 123 (regardless of whether or not an entity
elected to recognize compensation cost in the financial statements or only in pro forma disclosures) or under ASC 718 OR FAS
123 (R), and
2. In operations (income tax expense), to the extent the write-off exceeds previous excess tax benefits recognized in equity.
“Option123” tax-effects compensation expense over the vesting period. Unlike other programs, this Program has the ability to adjust
deferred tax accounts for any tax rate changes that arise during the vesting period. Accounting for income taxes related to share-based
compensation can be complicated, consulting to your tax advisor may be necessary. Tax rates are entered in the Forfeiture/Estimate
part on “Exp Sum” worksheet.
- Presentation and Disclosure
ASC 718 or FAS 123 (R)’s requirement that the compensation cost associated with share-based payments be recognized in the
financial statements (eliminating the pro forma disclosure alternative) is a significant change in accounting for many companies that, in
some cases, will be recognizing that compensation cost in their financial statements for the first time.
ASC 718 or FAS 123 (R) require entities to provide disclosures with respect to share-based payments to employees and non-
employees that satisfy the following objectives:
An entity with one or more share-based payment arrangements shall disclose information that enables users of the financial
statements to understand:
- The nature and terms of such arrangements that existed during the period and the potential effects of those arrangements on
- The effect of compensation cost arising from share-based payment arrangements on the income statement
- The method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted (or
offered to grant), during the period
- The cash flow effects resulting from share-based payment arrangements.
ASC 718 or FAS 123 R indicates the minimum information needed to achieve those objectives and illustrate how the disclosure
requirements might be satisfied. In some circumstances, an entity may need to disclose information beyond that required by ASC 718
or FAS 123 R to achieve the disclosure objectives.
An entity that acquires goods or services other than employee services in share-based payment transactions shall provide disclosures
similar to those required by ASC 718 or FAS 123R to the extent that those disclosures are important to an understanding of the effects
of those transactions on the financial statements. In addition, an entity that has multiple share-based payment arrangements with
employees shall disclose information separately for different types of awards under those arrangements to the extent that differences
in the characteristics of the awards make separate disclosure important to an understanding of the entity’s use of share-based
In “Option123”, the following disclosures are provided in both interim and annual report: For current fiscal period, the number of shares,
weighted average exercise price, weighted remaining contract term, and aggregate intrinsic value for
- Those outstanding at the end of the year
- Those exercisable or convertible at the end of year
- Exercised or converted
- Forfeited, and
For current fiscal period, the number and weighted grant-date fair value (intrinsic value) for
- Those non-vested at the beginning of the year
- Those non-vested at the end of the year
- Those granted
- Vested, and
For current fiscal period, the summary information of the following assumptions:
- Expected volatility
- Weighted-average volatility
- Expected dividend
- Expected term
- Risk-free rate