PCAOB Issues Guidance on Auditing the Fair Value of

Share Options Granted to Employees

October 17, 2006

FEI Summary

On Oct. 17, 2006, the Public Company Accounting Oversight Board (PCAOB or the board) issued staff questions and answers applicable to audits of financial statements in circumstances in which a company has granted share options to employees that must be accounted for as compensation cost in conformity with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS 123R). According to the press release, this series of questions and answers is limited to addressing auditing the fair value measurements associated with determining compensation cost.  It highlights risk factors that auditors should be aware of and addresses the auditor’s consideration of the process for developing a fair value estimate, significant assumptions used in options pricing models, and the role of specialists in fair value measurements.

Specifically, the document includes twenty-two sets of questions and answers in the following categories:

·         General

·         The Company’s Process

·         Risk Factors

·         Model Selection

·         Assumptions Used in Option-Pricing Models

o        Expected Term of the Option

o        Expected Volatility

o        Historical Volatility

o        Implied Volatility

o        Combined Volatility

o        Risk-free interest rate(s) and expected dividends

·         Validation of Data and Option-pricing Model

·         Role of Specialists

Staff questions and answers set forth the staff's opinions on issues related to the implementation of the standards of the PCAOB. The staff publishes questions and answers to help auditors implement, and the board’s staff administer, the board’s standards. The statements contained in the staff questions and answers are not rules of the board, nor have they been approved by the board.

Press Release

Staff Questions and Answers

Prepared Oct. 17, 2006 by Christine DiFabio (cdifabio@FinancialExecutives.org), Director, Technical Activities, Financial Executives International (FEI). This summary does not represent FEI opinion, unless specifically noted above.