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Repricing and Exchanges

With 100% audit acceptance in over a decade of practical experience, you can count on FAS Solutions to get your grant modifications right.

Option repricing and option exchanges are particular common place in challenging markets. We saw the explosion of this in 2008-9. In March 2009 FAS Solutions performed the largest most highly scrutinized option repricing valuation in history. Our unsurpassed valuation expertise and understanding of equity compensation accounting has proven essential in meeting the challenges of decision-making in this important area.

FAS Solutions’ comprehensive modification process begins with analyzing the terms of the modification with our client and assisting (as needed) to determine the correct accounting treatment and the shares impacted. We often find ways to limit the expense of the modification or insure cost-neutrality with a simple adjustment of the terms of the agreement. However, our main contribution is in the valuation space where clients depend on our expertise to assist with equity awards from options to relative TSR awards.

For options in particular there is a misconception that the valuations mid-stream for options that are not at-the-money are beyond the scope of Black-Scholes. This begs the question – do outstanding options at various levels of “moneyness” with various remaining contractual terms require a Monte Carlo or Lattice model to ascertain the fair value. The answer is that we can use Black-Scholes so long as the recalibrated intensity-based Monte Carlo is used to develop the correct expected term parameter. We have a long history of successful audits of our Black-Scholes valuations in cases of modifications in a spin-off circumstance as well as modifications in circumstances related to business combinations, repricing, exchange, executive termination grace periods or acceleration, retirement eligibility conditions, etc. In the vast majority of these cases, unless vesting is contingent on a market condition (TSR, price hurdles, etc.) our intensity-based Monte Carlo expected term methodology delivers a Black-Scholes solution to our clients. The intensity-based Monte Carlo can be developed with client data and/or cross-company data which informs both pre-modification and post-modification valuations. Whether using own-company data or cross-company data (based on over a million exercises at hundreds of companies) FAS Solutions produces audit-tested expected term results for outstanding grants that are no longer “at the money”. We then calculate the incremental expense or replacement fair value, and provide clients with detailed reporting which documents and supports expense recognition. At the request of clients we can also assist in the capture of modification expense in the stock plan database.