Financial Reporting Financial Reporting
  March 2006   

 Issues Covered



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What are issues that private and small public companies should focus on?

Keeping in mind that one size does not fit all, accounting for share-based payment may pose some additional complications for smaller companies that may not have sufficient historical data or means of analyzing and tracking that data. For example, estimation of vesting and forfeitures may pose challenges for those companies that may not have an established pattern of employee turnover or may not have a well-designed system in place for tracking forfeiture behavior. Even smaller companies that have the data may not feel that the employee base is large enough for that data to be predictive. As mentioned previously, private companies may now need to rely on the historical volatility of comparable public companies or sector indices to estimate expected volatility if they do not have adequate basis to estimate the expected volatility of their own stock price. Under Statement 123, private companies could use the minimum value method with zero volatility. Selection of an appropriate index will pose the most difficulty as a company will need to consider multiple factors including: (a) how closely the operations of the companies within the index mirror the company's own operations, (b) business life cycles of the companies that comprise the index, (c) relative sizes of the companies that comprise the index, and (d) availability of more frequent pricing observations. A company that operates in a variety of different industry sectors may need to consider selecting multiple indices and then weighting them in accordance with the nature of its own operations.

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