FAS 123R: Accounting for Stock Options

SFAS 123R, Share Based Payment, provides the accounting guidance for a broad spectrum of compensation instruments, including equity shares, equity share options, other equity instruments or liabilities that are based, at least in part, on the price of the issuer's shares. SFAS 123R requires companies to recognize the cost of employee services received in exchange for share-based payments based on the respective grant date fair value of the award. One of the first steps is determining the most suitable valuation model. There are two primary models in use: the Modified Black-Scholes model and the binomial lattice model. Some recommendations concerning factors to consider in estimating expected term and expected volatility are discussed.