MARKET-BASED STOCK OPTION VALUATIONS RECEIVE SEC BLESSING

The SEC Speaks
SEC Chief Accountant, Conrad Hewitt, in a January 25, 2007 letter, said that an auction market approach designed and tested by Zions Bancorporation may be used as a basis for valuing employee stock option awards for purposes of expensing these awards for financial reporting purposes under FASB Statement 123R.

Zions' Market Test
In June, 2006, Zions conducted a public on-line auction of a new security called an ESOARS (Employee Stock Option Appreciation Rights Security). The ESOARS are a tracking security designed to mimic the economic payout that an investor would receive were he to invest in a representative sample of a certain underlying group of Zions Bancorporation employee stock options. Investors in ESOARS receive payments on the ESOARS in an amount proportional to the amount that the employees receive from exercise of their options. A detailed description of ESOARS can be found at www.ESOARS.com.

Zions conducted this test because it felt that the most widely-used option valuation models being currently employed to value employee stock options, the Black-Scholes-Merton model and the matrix model, don’t totally faithfully replicate the unique economics of employee stock options. Therefore, these models shouldn’t be relied upon alone to provide an accurate measure of the fair value of employee stock options. Zions believed that if they could expose to the marketplace a security that more faithfully shadows real employee stock options, then the market would yield up a price that more accurately represents the true fair value of the underlying options. [Read More]