John Hancock, a securities attorney with Foley Hoag LLP in
Boston, advises financial executives that if they are a CFO or
controller, "They have to be extremely well versed in 123R and 409A.” Why?
Because although FAS 123R and Sec. 409A both address the valuation of
options, the details of the rules differ in significant ways.
The Internal Revenue Service requires a “fair market value”
approach under Section 409A and provides specific safe harbors for valuing
the common stock underlying employee stock options of privately-held
companies. If a stock option with standard time-based vesting does
not satisfy the requirements of Sec. 409A because it is granted at
a discount to fair market value, the IRS imposes significant
penalties. The Financial Accounting Standards Board, which governs GAAP
financial reporting standards, requires a “fair value” approach to valuation
and recommends use of the AICPA practice aid entitled “Valuation
of Privately-Held Company Equity Securities Issued as Compensation.”
Although it sounds simple, Dan Kossmann, the Chief Financial
Officer of Initiate Systems, Inc., refers to FAS 123R as “an
administrative nightmare.” Kossmann, who has used Two Step Software’s tool
called Equity Focus to help automate stock option administration and
reporting at his last two companies because it consolidates
capitalization information and the documents related to valuation, said: “I don’t know how larger companies can do it without implementing a software system.”
Scott Goodwin, a partner at Wolf & Company in Boston,
echoes that point suggesting that, “The key is to hire an outside
consultant to help with valuation and also use sophisticated software
to accumulate the data on the options, calculate their fair value
and identify what the expense should be currently and in future periods.”
This was Part 2 of a 3-page white paper. Coming next time… Part3 – “Recommendations for Winning The Stock Option Valuation Game."
Or read the full article now at http://www.twostep.com/news/whitepapers.asp - “The Stock Option Valuation Game"