There is a tension between relevance and reliability when it comes to valuing employee stock options, according to Daniel Abrams. There will also be a new reality — companies will have to expense employee stock options in their financial statements starting in June.
How they will do that isn't an easy question to answer, said Mr. Abrams, formerly a financial economist with NERA Economic Consulting Inc., a subsidiary of Mercer Inc., which is a unit of Marsh & McLennan Cos. He has since formed his own consulting firm, FAS123 Solutions, Teaneck, N.J.
Companies will likely use either the Black-Scholes-Merton model, a lattice approach or Monte Carlo simulation, each of which could lead to different valuations, he said.
The Financial Accounting Standards Board, which wrote the new rule, known as FAS 123 (Revised), leaves the choice of the valuation methodology up to the companies. To help corporate executives decide, Mr. Abrams has written "AFP Guide to Valuing Employee Stock Options," a book published by the Association for Financial Professionals.
"Most people believe options are relevant," Mr. Abrams said. "But many people believe options cannot be valued reliably enough to get consistency within a company from time period to time period or reliably enough to get comparability across companies."
"I think more companies at first will use Black-Scholes, because that is what they have been using," he said. "Path of least resistance is to use the simplest model."