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Chapter 6: Expense Attribution Schedule. The ESOs valued will have to be attributed over the life of the option. This expense attribution can employ a straight-line method that is simple and takes the value of the ESO and evenly allocates its value starting from the vested period and extending to the option’s maturity. | 6 Expense Attribution Schedule ESO EXPENSE ATTRIBUTION SCHEDULE AS MINIGRANTS The ESOs valued will have to be attributed over the life of the option. This expense attribution can employ a straight-line method that is simple and takes the value of the ESO and evenly allocates its value starting from the vested period and extending to the option s maturity. The alternative approach is to treat each grant as a separate award effectively creating multiple minigrants over time. It is still unclear at the time of writing which method will be chosen but the exposure draft seems to prefer the minigrant approach. This chapter focuses on the more complex minigrant approach. The 2004 proposed FAS 123 revisions require that each ESO grant be treated as separate awards for the purposes of expensing the ESO over its vesting life. The 1995 FAS 123 provided alternative methods of measuring and recognizing compensation cost for awards with graded vesting that is awards for which different parts vest at different times. The revised 2004 FAS 123 requires a single method under which those different parts are treated as separate awards in estimating fair value and attributing compensation cost. To illustrate the separate awards or minigrant expense allocation Table 6.1 shows the total ESO valuation results.1 The total valuation for the firm s ESO using the customized binomial lattice is 813.99 million compared to 914.34 million using the naïve BSM or 863.96 million using the modified BSM. Clearly there is over a 49.96 million reduction in expenses when using the customized binomial lattice approach. Using the customized binomial lattice result of 813.99 million the option grants have to be first allocated per FAS 123 before the actual expenses 65 TABLE 6.1 Example Valuation Summary S3 S3 6 Month Cliff and then 42 Month Per Share Closing Stock Price 48 Months Vest Vest Date Conservative Aggressive Average New Hire Grant Acquisition Focal Total End Dec 04 Start Jan 05 45.17 50.70 47.93 .