Zions Bancorp Approach to Stock Option Pricing Raises New Concerns

According to Associated Press stories on July 19 and July 23, new issues have arisen over the use of Employee Stock Option Appreciation Rights Securities (ESOARS) as a means to value employee stock options for company accounting purposes. ESOARS are a marketable security that tracks employee option benefits (see the May 15 Employee Ownership Update). Zions Bancorp held the first-ever auction of the securities in 2007, resulting in a price of $12.07. Jeff Mahoney of the Council of Institutional Investors told the AP that it "appears that the SEC staff [by its inaction on this matter after the auction] has agreed to permit Zions to use the price of Zions ESOARS to value their options." He called this "surprising and disappointing." The SEC has declined to say whether its inaction means it is endorsing the approach, however.

At the same time, concerns have been raised whether financial products like ESOARS are equity instruments or liabilities. Companies would prefer to record them as equities, but FASB has not decided on what approach to take and probably will not for at least another year. Liability accounting might discourage some companies from using the ESOARS approach because it could partly or entirely offset any apparent accounting gains from the presumably lower options price the company would have to charge against income if it used the ESOARS approach.