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Expensing Equity-Based Compensation Programs

In December 2004, the Financial Accounting Standards Board (FASB) released FAS 123(R), which requires companies to recognize financial statement expense for stock-based payments to their employees.

Under FAS 123(R) (now updated to FASB ASC Topic 718) stock option expense is determined by valuing options at their fair value at grant date, using prescribed models and a variety of assumptions such as price volatility, rates of return and yield rates. A primary assumption is the predication of option exercise times based on employee behavior. Expense is greater or lesser depending on the model and assumptions used. Our case studies have shown a significant decrease in expense using modeling techniques based on a detailed analysis of the company’s employee exercise behavior.

The objective of the FASB ASC Topic 718 stock option valuation is to produce a fair, reasonable, and defensible expense for the company’s financial statements. Actuaries are uniquely trained and qualified to perform these valuations based on similar valuations we do for employee benefit programs. The expertise our actuaries bring to stock-based payment valuations can:

  • More accurately anticipate employee behavior
  • Reduce expense
  • Comply with FASB ASC Topic 718
  • Pass an audit

Our solution. Most companies will want to hand off the burden of option pricing to experts who can handle all aspects of the required data analysis, assumption-setting and modeling. Our actuaries and team of tax and accounting specialists, compensation consultants and financial risk analysis experts can develop a valuation approach which optimizes the outcome within fair, reasonable and defensible guidelines, provide auditable documentation of our processes and assist with all related accounting issues. (See Our Solution for more information on the comprehensive employee stock option valuation services available to our clients.)

Venuti & Associates is a full-service actuarial and benefits consulting firm. We would be happy to meet with you to further discuss our services. Feel free to contact us at (650) 960-5700 or dvenuti@venutiassociates.com.

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