Five key areas comprise any company’s FAS 123R strategy – each of which can have a significant impact to any organizations ’ successful compliance to the standard – These include: (1) option data structure, (2) valuation inputs and valuation methodology, (3) financial reporting, (4) audit and (5) budgeting/forecasting..

Important considerations for each key area:

1. Option data structure
   
   One area often overlooked or misunderstood is the option data itself. Many organizations that have leveraged a stock plan administration system for the tracking of their stock option transactions, have not been aware that their stock option data has not been stored to enable accurate financial reporting. Here, the old adage, “garbage in = garbage out” is paramount. And many companies do not recognize the root of their issue until they are already deep into a reporting phase, which can often lead to fire drills during reporting periods.
   
   A FAS123R strategy poised for success is one that ensures the data is stored and tracked such that it produces accurate results.
   
   
2. Valuation input/methodology
   
   The expense for most forms of stock-based compensation is equal to the fair value of the arrangement. While FAS123R does not require companies to utilize a specific pricing model, the standard does require that the valuation technique used adheres to the following principles:
   
   
   • is applied in a manner consistent with the fair value measurement objective and other requirements of SFAS No. 123(R),
   • is based on the established principles of financial economic theory and generally applied in that field
   • reflects all substantive characteristics of the instrument and
   • the model should consider six factors: exercise price and expected term of the option, the fair market value, expected volatility and expected dividend yield of the underlying stock and the risk-free interest rate.
     
     
   The key to adhering to the valuation principles outlined in FAS 123R and developing a robust valuation methodology? Rigorous analysis and understanding of prior option behavior to uncover the patterns of your optionee base that best reflect the attributes of the future awards your organization plans to issue.
   
   
   
   
3. Financial reporting
   
   Central to any organization’s FAS123R strategy is their financial reporting process: the process by which they determine the period expense, deferred tax asset, earnings per share dilution and disclosure information each reporting period. Reports generated with sound methodologies and accurate calculations are the bare minimum requirements to ensuring that the financial numbers you report will be both accurate and defensible; the reporting process itself must be consistent, efficient, and minimize the risk of manual error or changes to the calculations.
   
   Our recommendation? Develop a repeatable reporting process that reduces the risk of error in calculations and delivers the necessary level of transparency into the numbers so that your internal and external stakeholders will have confidence in the changes in your expense, DTA and EPS values period over period.
   
   
4. Audit
   
   In general, preparing for reviews and annual audits can be both stressful and time consuming – And, with a new compliance standard, it can be a guessing game regarding what specific information will even be required and which areas will be under the microscope for further scrutiny.
   
   The right documentation presented in the optimal way can pave the way for a more efficient and effective audit. A focus on delivering documentation that provides transparency into the chosen methodologies, supporting calculations and final numbers will enable a more streamlined and cost-effective process with auditors and reduce the risk of costly errors.
   
   
5. Forecasting and budgeting
   
   An effective FAS 123R strategy does not end with a successful audit. Key internal stakeholders want to know more about the future costs associated with current or planned option grants to better ensure consistent earnings and better inform their decision-making. Developing a reliable forecast in any area of finance and accounting is a challenge, and predicting stock option expense and the potential dilutive effect on earnings is not an exception.
   
   Enable effective decision-making in the area of option plan design and budgeting by gaining a thorough understanding of the key drivers of your specific company’s stock option plan expenses and an effective way to communicate the information to key stakeholders in the planning process.