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Research shows that up to 30% of public
companies have allowed their executives to time when stock options
are issued. This widespread practice, which may be illegal, has
led to increased scrutiny of accounting practices by the Public
Company Accounting Oversight Board (PCAOB), which was created
by the Sarbanes-Oxley Act.
More and more companies are being investigated
for back-dating stock options to benefit senior executives. As
a result, CFOs and auditors of public companies now have to be
especially diligent about how they value stock options and restricted
securities.
Valuation is not the only issue -- how
the valuation is reached is also important. The PCAOB recently
cited an accounting firm for failing to perform and document adequate
procedures for option valuations.
New Rules
New
accounting rules for both acquisition and stock-based compensation
should be taken seriously. Companies that are not fully compliant
are subject to fines, lawsuits and negative publicity. The potential
impact on share prices and brand value can be difficult to overcome.
Pluris Valuation Advisors provides valuations
that are fully compliant with financial reporting standards. We
provide valuations for:
- Stock-based compensation accounting
(restricted stock or employee stock options)
- Purchase price allocation
- Asset impairment accounting
- Companies going public
- "Cheap stock" valuation
analyses
Fair Value
The
Financial Accounting Standards Board (FASB) defines the term "fair
value" in Concepts Statement No. 7 as, "The amount at
which that asset (or liability) could be bought (or incurred)
or sold (or settled) in a current transaction between willing
parties, that is, other than in a forced or liquidation sale."
While this definition specifically addresses
the value of assets and liabilities, the FASB has held that is
also applies to equity instruments. As such, it validates the
importance of using market data for valuing stock options and
restricted stock.
The FASB is also in the process of preparing
a new Financial Accounting Standard expected to be released this
fall. The new standard will elevate FASB fair-value guidelines
to Level A GAAP.
Because of inherent differences between
employee stock options and restricted stock, and their market-traded
equivalents, analysts usually rely on theoretical models for FAS
123R valuations.
Pluris Valuation Advisors has in-depth
experience using both theoretical models and data from comparable
transactions to develop valuations that will withstand audit scrutiny.
For an overview of how valuation methods for employee securities
and investor securities differ, please e-mail
us.
Why Pluris?
Pluris
has in-depth experience in, and knowledge of:
- Option and restricted-stock valuation
theory
- Purchase price allocation and impairment
testing
- Applicable accounting standards and
staff accounting bulletins
All of these skills are necessary to
produce valuations and reports that pass muster with auditors.
For more information on our financial
reporting valuations, contact Pluris
today.
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