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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
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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.72
Academic 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.73
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.
72 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.
73 J.N. Carpenter, The exercise and valuation of executive stock options, Journal of Financial Economics, 1998, pp.127158 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 studys 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, Journal of Financial Economics, May 2005, pp. 445470. 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. 115142.

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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 companys 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.
The staff does not expect that such a simplified method would be used for share option grants when more relevant detailed information is available to the company.
3. Current Price of the Underlying Share Including Considerations for SpringLoaded Grants FASB ASC paragraph 718105521
states that if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718105511, and requires such valuation technique or model to take into account, at a minimum a number of factors including the current price of the underlying share.
FASB ASC paragraph 718105527
states, Assumptions used to estimate the fair value of equity and liability instruments granted in share-based payment transactions shall be determined in a consistent manner from period to period. For example, an entity
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might use the closing share price or the share price at another specified time as the current share price on the grant date in estimating fair value, but whichever method is selected, it shall be used consistently.
For a valuation technique to be consistent with the fair value measurement objective and the other requirements of Topic 718, the staff believes that a consistently applied method to determine the current price of the underlying share should include consideration of whether adjustments to observable market prices e.g., the closing share price or the share price at another specified time are required.
Such adjustments may be required, for example, when the observable market price does not reflect certain material non-public information known to the company but unavailable to marketplace participants at the time the market price is observed.
Determining whether an adjustment to the observable market price is necessary, and if so, the magnitude of any adjustment, requires significant judgment. The staff acknowledges that companies generally possess non-public information when entering into sharebased payment transactions. The staff believes that an observable market price on the grant date is generally a reasonable and supportable estimate of the current price of the underlying share in a share-based payment transaction, for example, when estimating the grantdate fair value of a routine annual grant to employees that is not designed to be spring-loaded.
However, companies should carefully consider whether an adjustment to the observable market price is required, for example, when share-based payments arrangements are entered into in contemplation of or shortly before a planned release of material non-public information, and such information is expected to result in a material increase in share price. The staff believes that non-routine spring-loaded grants merit particular scrutiny by those charged with compensation and financial reporting governance. Additionally, when a company has a planned release of material non-public information within a short period of time after the measurement date of a share-based payment, the staff believes a material increase in the market price of the companys shares upon release of such information indicates marketplace participants would have considered an adjustment to the observable market price on the measurement date to determine the current price of the underlying share.

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