The Securities and Exchange Commission's Office of the Chief Accountant and Division of Corporation Finance have released a staff accounting bulletin intended to help public companies value stock option grants to employees on their income statements.

Under SAB 110, eligible public companies can continue to use a simplified method for estimating stock option expenses if their own historical experience doesn't provide enough stock option exercise data. That ability was provided in SAB 107 nearly three years ago. SAB 110 extends this ability, which otherwise would have expired Dec. 31, 2007. The extension will mainly help small public companies that lack much historical exercise data.

Under the Financial Accounting Standard that requires the expensing of stock options, companies may rely on algorithms such as the widely used Black-Scholes-Merton pricing model to calculate their stock option expenses. If companies don't have enough historic data available, they can use a simplified rule based on the average of the time to vesting and the full term of the option to estimate the term.

When SAB 107 was issued nearly three years ago, the SEC staff expected that detailed historical information about employee exercise behavior in other companies, such as actuarial studies based on patterns in similar industries or in comparable situations, would soon be readily available. As the Dec. 31, 2007, deadline in SAB 107 quickly approaches, however, the detailed information is still not readily available.

As a result, the SEC will continue to accept use of the simplified method on an interim basis, provided a company concludes that its own historical share option exercise experience doesn't provide a reasonable basis for estimating expected term. Once relevant detailed external information about exercise behavior becomes widely available for companies to make more refined estimates, the SEC will no longer accept use of the simplified method.

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