FASB Allows Closely Held Companies Simpler Option Valuation Method

At its October 19 meeting, the Financial Accounting Standards Board (FASB) tentatively decided to change its stance on how closely held companies value options. The Exposure Draft on accounting reform allowed these companies to use either the fair value method public companies must use (that is, to apply a valuation model incorporating six required variables) or the intrinsic value method, with a strong preference for the former. The recent decision would now require these companies either to use the fair value method using an estimate of volatility for the individual company or, alternatively, a calculated value of volatility based on an appropriate stock market index. For most closely held companies, projecting volatility was by far the most difficult element in using one of the valuation models.