The safe harbor rule of SEC Staff Accounting Bulletin 107 (SAB 107) allows companies to use the simplified method to estimate the expected term for employee stock options. Released in March 2005, SAB 107 was slated to sunset on Dec 31, 2007. On Dec 21, 2007, the SEC released SAB 110, which enables eligible companies to continue to use the simplified method. SEC, however, has tightened the rules by permitting the use of the SAB 107 simplified method only if the company does not have sufficient historical exercise data to provide a reasonable basis for an estimate of the expected term. In the aftermath of the safe harbor rule, companies that have historically relied on the simplified method to value their plain vanilla options will have two basic choices: transition to the binomial model or adopt of a more rigorous methodology for the determination of expected life of stock option grants.
Expected Life After SAB 107 and SAB 110 Cindy W Ma The CPA Journal; May 2009; 79, 5; Docstoc pg. 36 Reproduced
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