Employee Stock Option - Valuation

Valuation

The value of an ESO follows the valuation techniques used for standardized options. The same models used in valuing standardized options, such as Black–Scholes and the binomial model, are also used for ESOs. Often, the only inputs to the pricing model that cannot be readily determined is the estimate of future volatility of the stock, and the appropriate expected time to expiration to use. However, there are a variety of services that are now offered to help determine appropriate values.

As of 2006, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) agree that the fair value at the grant date should be estimated at the grant date using an option pricing model. The majority of public and private companies apply the Black–Scholes model, however, through September 2006, over 350 companies have publicly disclosed the use of a binomial model in SEC filings.