

[Federal Register: December 31, 2007 (Volume 72, Number 249)]
[Rules and Regulations]               
[Page 74168-74169]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31de07-4]                         

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 211

[Release No. SAB 110]

 
Staff Accounting Bulletin No. 110

AGENCY: Securities and Exchange Commission.

ACTION: Publication of Staff Accounting Bulletin.

-----------------------------------------------------------------------

SUMMARY: This staff accounting bulletin (``SAB'') expresses the views 
of the staff regarding the use of a ``simplified'' method, as discussed 
in SAB No. 107 (``SAB 107''), in developing an estimate of expected 
term of ``plain vanilla'' share options in accordance with Statement of 
Financial Accounting Standards No. 123 (revised 2004), Share-Based 
Payment. In particular, the staff indicated in SAB 107 that it will 
accept a company's election to use the simplified method, regardless of 
whether the company has sufficient information to make more refined 
estimates of expected term. At the time SAB 107 was issued, the staff 
believed that more detailed external information about employee 
exercise behavior (e.g., employee exercise patterns by industry and/or 
other categories of companies) would, over time, become readily 
available to companies. Therefore, the staff stated in SAB 107 that it 
would not expect a company to use the simplified method for share 
option grants after December 31, 2007. The staff understands that such 
detailed information about employee exercise behavior may not be widely 
available by December 31, 2007. Accordingly, the staff will continue to 
accept, under certain circumstances, the use of the simplified method 
beyond December 31, 2007.

DATES: Effective December 21, 2007.

FOR FURTHER INFORMATION CONTACT: Sandie E. Kim or Mark J. Barrysmith, 
Office of the Chief Accountant (202) 551-5300, or Craig C. Olinger, 
Division of Corporation Finance (202) 551-3400, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins 
are not rules or interpretations of the Commission, nor are they 
published as bearing the Commission's official approval. They represent 
interpretations and practices followed by the Division of Corporation 
Finance and the Office of the Chief Accountant in administering the 
disclosure requirements of the Federal securities laws.

    Dated: December 21, 2007.
Florence Harmon,
Deputy Secretary.

PART 211--[AMENDED]

0
Accordingly, Part 211 of Title 17 of the Code of Federal Regulations is 
amended by adding Staff Accounting Bulletin No. 110 to the table found 
in Subpart B.

Staff Accounting Bulletin No. 110

    Effective January 1, 2008, the staff hereby amends and replaces 
Question 6 of Section D.2 of Topic 14, Share-Based Payment, of the 
Staff Accounting Bulletin Series. Question 6 of Topic 14: D.2 (as 
amended) expresses the views of the staff regarding the use of a 
``simplified'' method in developing an estimate of expected term of 
``plain vanilla'' share options in accordance with Statement of 
Financial Accounting Standards No. 123 (revised 2004), Share-Based 
Payment.

    Note: The text of SAB 110 will not appear in the Code of Federal 
Regulations.

TOPIC 14: SHARE-BASED PAYMENT

* * * * *

D. Certain Assumptions Used in Valuation Methods

* * * * *

2. Expected Term

* * * * *
    Facts: Company E grants equity share options to its employees that 
have the following basic characteristics: \75\
---------------------------------------------------------------------------

    \75\ Employee share options with these features are sometimes 
referred to as ``plain vanilla'' options.
---------------------------------------------------------------------------

     The share options are granted at-the-money;
     Exercisability is conditional only on performing service 
through the vesting date; \76\
---------------------------------------------------------------------------

    \76\ 76 In this fact pattern the requisite service period equals 
the vesting period.
---------------------------------------------------------------------------

     If an employee terminates service prior to vesting, the 
employee would forfeit the share options;
     If an employee terminates service after vesting, the 
employee would have a limited time to exercise the share options 
(typically 30-90 days); and
     The share options are nontransferable and nonhedgeable.
    Company E utilizes the Black-Scholes-Merton closed-form model for 
valuing its employee share options.
    Question 6: As share options with these ``plain vanilla'' 
characteristics have been granted in significant quantities by many 
companies in the past, is the staff aware of any ``simple'' 
methodologies that can be used to estimate expected term?
    Interpretive Response: As noted above, the staff understands that 
an entity that is unable to rely on its historical exercise data may 
find that certain alternative information, such as exercise data 
relating to employees of other companies, is not easily obtainable. As 
such, some companies may encounter difficulties in making a refined 
estimate of expected term. Accordingly, if a company concludes that its 
historical share option exercise experience does not provide a 
reasonable basis upon which to estimate expected term, the staff will 
accept the following ``simplified'' method for ``plain vanilla'' 
options consistent with those in the fact set above: expected term = 
((vesting term + original contractual term) / 2). Assuming a ten year 
original contractual term and graded vesting over four years (25% of 
the options in each grant vest annually) for the share options in the 
fact set described above, the resultant expected term would be 6.25 
years.\77\ Academic

[[Page 74169]]

research on the exercise of options issued to executives provides some 
general support for outcomes that would be produced by the application 
of this method.\78\
---------------------------------------------------------------------------

    \77\ Calculated as [[[1 year vesting term (for the first 25% 
vested) plus 2 year vesting term (for the second 25% vested) plus 3 
year vesting term (for the third 25% vested) plus 4 year vesting 
term (for the last 25% vested)] divided by 4 total years of vesting] 
plus 10 year contractual life] divided by 2; that is, (((1+2+3+4)/4) 
+ 10) /2 = 6.25 years.
    \78\ J.N. Carpenter, ``The exercise and valuation of executive 
stock options,'' Journal of Financial Economics, 1998, pp. 127-158 
studies a sample of 40 NYSE and AMEX firms over the period 1979-1994 
with share option terms reasonably consistent to the terms presented 
in the fact set and example. The mean time to exercise after grant 
was 5.83 years and the median was 6.08 years. The ``mean time to 
exercise'' is shorter than expected term since the study's sample 
included only exercised options. Other research on executive options 
includes (but is not limited to) J. Carr Bettis; John M. Bizjak; and 
Michael L. Lemmon, ``Exercise behavior, valuation, and the incentive 
effects of employee stock options,'' forthcoming in the Journal of 
Financial Economics. One of the few studies on nonexecutive employee 
options the staff is aware of is S. Huddart, ``Patterns of stock 
option exercise in the United States,'' in: J. Carpenter and D. 
Yermack, eds., Executive Compensation and Shareholder Value: Theory 
and Evidence (Kluwer, Boston, MA, 1999), pp. 115-142.
---------------------------------------------------------------------------

    Examples of situations in which the staff believes that it may be 
appropriate to use this simplified method include the following:
     A company does not have sufficient historical exercise 
data to provide a reasonable basis upon which to estimate expected term 
due to the limited period of time its equity shares have been publicly 
traded.
     A company significantly changes the terms of its share 
option grants or the types of employees that receive share option 
grants such that its historical exercise data may no longer provide a 
reasonable basis upon which to estimate expected term.
     A company has or expects to have significant structural 
changes in its business such that its historical exercise data may no 
longer provide a reasonable basis upon which to estimate expected term.
    The staff understands that a company may have sufficient historical 
exercise data for some of its share option grants but not for others. 
In such cases, the staff will accept the use of the simplified method 
for only some but not all share option grants. The staff also does not 
believe that it is necessary for a company to consider using a lattice 
model before it decides that it is eligible to use this simplified 
method. Further, the staff will not object to the use of this 
simplified method in periods prior to the time a company's equity 
shares are traded in a public market.
    If a company uses this simplified method, the company should 
disclose in the notes to its financial statements the use of the 
method, the reason why the method was used, the types of share option 
grants for which the method was used if the method was not used for all 
share option grants, and the periods for which the method was used if 
the method was not used in all periods. Companies that have sufficient 
historical share option exercise experience upon which to estimate 
expected term may not apply this simplified method. In addition, this 
simplified method is not intended to be applied as a benchmark in 
evaluating the appropriateness of more refined estimates of expected 
term.
    Also, as noted above in Question 5, the staff believes that more 
detailed external information about exercise behavior will, over time, 
become readily available to companies. As such, the staff does not 
expect that such a simplified method would be used for share option 
grants when more relevant detailed information becomes widely 
available.

[FR Doc. E7-25178 Filed 12-28-07; 8:45 am]

BILLING CODE 8011-01-P
