On October 13, 2006, James Walling, CFA of PricewaterhouseCoopers LLP presented to attorneys in Redwood City, CA on understanding valuations.
Financial reporting and tax standards are migrating their views though there are still differences relating to discounts and premiums.
There is a migration to fair value versus fair market value. Changes impact balance sheets and income statements. There are charges for equity compensation, transaction accounting.
Fair value assumptions are management’s responsibility. The estimates need to be reasonable and supportable. Auditors must be able to review adequate documentation. Subjective assumptions must have basis.
Standards used in compensation valuation include: FAS 123R and IRS 409A. FAS 123R focuses on financial reporting relating to equity compensation to employees and non-employees. There is a presumption that the company knows how much its stock is worth.
IRS 409C relates to deferred compensation. Compensation is pushed to later periods such that there is benefit from tax differences. This allows, for example, a tax charge even when a stock is no longer in the money.
Typical option valuation models include: Black Scholes, binomial. The binomial model is similar to Black Scholes if the time is cut. It is more flexible that Black Scholes because it takes into account more factors. Inputs into the models include: time to expiration, stock price, strike price, volatility.
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