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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES1

term 33 of its share options. Certain methods may not be appropriate for longer term share options if they weight the most recent periods of Company Bs historical volatility much more heavily than earlier periods.34 For example, a method that applies a factor to certain historical price intervals to reflect a decay or loss of relevance of that historical information emphasizes the most recent historical periods and thus would likely bias the estimate to this recent history.35
2. Amount of Historical Data FASB ASC subparagraph 7181055
37a indicates entities should consider historical volatility over a period generally commensurate with the expected or contractual term, as applicable, of the share option. The staff believes Company B could utilize a period of historical data longer than the expected or contractual term, as applicable, if it reasonably believes the additional historical information will improve the estimate. For example, assume Company B decided to utilize a Black-Scholes-Merton closed-form model to estimate the value of the share options granted on January 2, 20X6 and determined that the expected term was six years. Company B would not be precluded from using historical data longer than six years if it concludes that data would be relevant.
3. Frequency of Price Observations FASB ASC subparagraph 7181055
37d indicates an entity should use appropriate and regular intervals for price observations based on facts and circumstances that provide the basis for a reasonable fair value estimate.
Accordingly, the staff believes Company B should consider the frequency of the trading of its shares and the length of its trading history in determining the appropriate frequency of price observations. The staff believes using daily, weekly or monthly price observations may provide a sufficient basis to estimate expected volatility if the history provides enough data points 33 For purposes of this staff accounting bulletin, the phrase expected or contractual term, as applicable has the same meaning as the phrase expected if using a Black-Scholes-Merton closedform model or contractual if using a lattice model term of a share option.
34 FASB ASC subparagraph 718105537a states that entities should consider historical volatility over a period generally commensurate with the expected or contractual term, as applicable, of the share option. Accordingly, the staff believes methods that place extreme emphasis on the most recent periods may be inconsistent with this guidance.
35 Generalized Autoregressive Conditional Heteroskedasticity GARCH is an example of a method that demonstrates this characteristic.

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on which to base the estimate.36
Company B should select a consistent point in time within each interval when selecting data points.37
4. Consideration of Future Events The objective in estimating expected volatility is to ascertain the assumptions that marketplace participants would likely use in determining an exchange price for an option.38 Accordingly, the staff believes that Company B should consider those future events that it reasonably concludes a marketplace participant would also consider in making the estimation. For example, if Company B has recently announced a merger with a company that would change its business risk in the future, then it should consider the impact of the merger in estimating the expected volatility if it reasonably believes a marketplace participant would also consider this event.
The staff believes that careful consideration is required to determine whether material non-public information is currently available or would be available to the issuer that would be considered by a marketplace participant in estimating the expected volatility.39 For example, if Company B
has entered into a material transaction that has not yet been announced prior to its grant of equity instruments, the specific facts and circumstances of the material transaction may lead Company B to conclude that the impact of this event should be included in estimating the expected volatility when determining the grant-date fair value of those equity instruments.
5. Exclusion of Periods of Historical Data In some instances, due to a companys particular business situations, a period of historical volatility data may not be 36 Further, if shares of a company are thinly traded the staff believes the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations. The volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
37 FASB ASC paragraph 718105540 states that a company should establish a process for estimating expected volatility and apply that process consistently from period to period. In addition, FASB ASC paragraph 718105527 indicates that assumptions used to estimate the fair value of instruments granted in share-based payment transactions should be determined in a consistent manner from period to period.
38 FASB ASC paragraph 718105535.
39 FASB ASC paragraph 718105513 states assumptions shall reflect information that is or would be available to form the basis for an amount at which the instruments being valued would be exchanged. In estimating fair value, the assumptions used shall not represent the biases of a particular party.

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relevant in evaluating expected volatility.40 In these instances, that period should be disregarded. The staff believes that if Company B disregards a period of historical volatility, it should be prepared to support its conclusion that its historical share price during that previous period is not relevant to estimating expected volatility due to one or more discrete and specific historical events and that similar events are not expected to occur during the expected term of the share option. The staff believes these situations would be rare.
Question 3: What should Company B
consider when evaluating the extent of its reliance on the implied volatility derived from its traded options?
Interpretive Response: To achieve the objective of estimating expected volatility as stated in FASB ASC
paragraphs 718105535 through 718
105541, the staff believes Company B
generally should consider the following in its evaluation: 1 The volume of market activity of the underlying shares and traded options; 2 the ability to synchronize the variables used to derive implied volatility; 3 the similarity of the exercise prices of the traded options to the exercise price of the newlygranted share options; 4 the similarity of the length of the term of the traded and newly-granted share options; 41 and 5 consideration of material non-public information.
1. Volume of Market Activity The staff believes Company B should consider the volume of trading in its underlying shares as well as the traded options. For example, prices for instruments in actively traded markets are more likely to reflect a marketplace participants expectations regarding expected volatility.
2. Synchronization of the Variables Company B should synchronize the variables used to derive implied volatility. For example, to the extent reasonably practicable, Company B
should use market prices either traded prices or the average of bid and asked quotes of the traded options and its shares measured at the same point in time. This measurement should also be synchronized with the grant of the share options; however, when this is not reasonably practicable, the staff believes Company B should derive implied volatility as of a point in time as close to the grant of the share options as reasonably practicable.
40 FASB

ASC paragraph 718105537.
generally Options, Futures, and Other Derivatives by John C. Hull Pearson, 11th Edition, 2021.
41 See
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