SEC Simplified Method Transition Considerations

The SEC “Simplified Method” was introduced in SAB 107 as a way for companies to estimate the expected term input assumption to the Black-Scholes-Merton formula without using historical data.

This Equity Compensation Issue Brief “previews” the results of our broader research efforts in this area, illustrating how a large number of companies are using the SEC Simplified Method longer than they should be from a pure ASC 718 compliance perspective AND that doing so is resulting in the near-systematic over-expensing of their stock options. Our research also assesses specifically the circumstances governing how and when companies should transition away from using the Simplified Method to an approach that utilizes their own historical exercise and cancellation data (hereafter referred to as a “data-driven” method).

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