Stock Option Expensing
(123R Calculations)

How to Account for Stock Option Expense - ASC 718 Reporting

It's a brand new world out there, one requiring companies to estimate and report an expense for share based pay. For most companies, this means using a complicated model to estimate the cost of a stock option.

The guidelines for valuing stock options are outlined in Accounting Standards Codification (ASC) 718 (formerly SFAS No. 123(R)). ASC 718 states that the valuation of stock options should be completed by utilizing Black-Scholes or some other option-pricing model

In most cases where a cost must be estimated and reported, companies usually turn to their accounting firm. Some companies still can. But companies with an outside auditor cannot expect their auditor to provide these calculations; auditors will audit the estimate provided by the company but the company has to provide an estimate to start the process.

We believe determining the "right" cost of an option is as much art as science. You not only have to understand the math but you also have to understand how a change in one variable will impact the calculation.

This website is not intended to give you a complete and thorough understanding of all the intricacies of Black-Scholes-Merton or other approaches. We do, however, want to give you an appreciation of the process.

First, let's have some fun. Click here for an illustration of how the formula variables can impact the calculation. Move the values around and watch the graph.

Next, how do we use this information? Long story short, we often conduct a sensitivity analysis for our clients which we call Scenario Testing. Click here for an illustration.

Now for information you can use. For a checklist you can print out and use, click here.

Lastly, here are some FAQs that we think you will find helpful:

David Harper is an editor of Investopedia and the following is a good summary of our views.

(Click on each question to see its answer, or expand all answers)

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