Marriott International, Annual Report
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Intrinsic Value – Call Option
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With the arrival of Ind AS, companies need to value and account for their stock option schemes using the fair value method. There are more ways in which Ind AS will affect companies running employee stock option schemes. These are described in more detail here. This post only focusses on methods to carry out fair valuation of employee stock options. Stock option plans have been highly successful globally in aligning the interests of the employees with those of the shareholders. In India too, many companies offer stock options to remunerate their employees. Globally, there are accounting standards that deal specifically with the accounting of employee stock options; e.
There are a range of rules and guidelines, that affect different companies differently. But each of them lack uniformity of application, or the authority of an accounting standard. For companies falling under the purview of the Indian Accounting Standards, Ind AS prescribes that the valuation of employee stock options be done as per the fair value method only.
How to Expense Stock Options Under ASC 718
A detailed description of how the companies will be affected by Ind AS can be found here. Thankfully, a simple relationship exists which will help in understanding the fair value concepts below:.
Time value can only be non-negative. Therefore, companies using the intrinsic value method understate the value of their stock options. The general approach is to calculate the fair value using one of the methods described below, and then time value is the difference between fair value and intrinsic value. Fair value, as required under Ind AS , can be calculated using any of the following methods, depending on the desire for accuracy and complexity of the options:.
This is the most widely used method and is considered appropriate for small schemes with simple rules. The formula is source: Wikipedia :.
Intrinsic Value of Stock Options
The parameters here are share price S , exercise price K , volatility sigma , duration till exercise T and risk free rate r. Once the values of the parameters are known, the option price can be easily calculated.
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The drawback of this method is that it may not allow for any complicated features; e. The method assumes a lognormal distribution of share price, which may not be correct under some circumstances, e. Black Scholes formula is most widely used in India for valuation of employee stock options.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan. Amount of accumulated difference between fair value of underlying shares on dates of exercise and exercise price on options exercised or share units converted into shares. Amount by which the current fair value of the underlying stock exceeds the exercise price of options outstanding. Weighted average price at which grantees can acquire the shares reserved for issuance under the stock option plan.
Line items represent financial concepts included in a table. These concepts are used to disclose reportable information associated with domain members defined in one or many axes to the table. The number of shares reserved for issuance pertaining to the outstanding exercisable stock options as of the balance sheet date in the customized range of exercise prices for which the market and performance vesting condition has been satisfied.
Amount of difference between fair value of the underlying shares reserved for issuance and exercise price of vested portions of options outstanding and currently exercisable.