PCAOB Issues Guidance on Fair Value of Options

October 19, 2006 (PLANSPONSOR.com) - The Public Company Accounting Oversight Board (PCAOB) has issued a staff question and answer document about auditing the fair value of share options granted to employees.

According to a PCAOB press release, the staff guidance provides direction for auditing a company’s estimation of the fair value of stock options granted to employees pursuant to Statement of Financial Accounting Standards No. 123 (Revised), Share-Based Payment. FAS 123R, which requires companies to recognize share-based payments to employees as a cost on the firm’s income statement rather than as an acknowledgement in the footnotes, became applicable for financial statements of companies with fiscal years ending on or after June 15, 2006.

The series of questions and answers is limited to addressing auditing the fair value measurements associated with determining compensation cost. According to the press release, the guidance highlights risk factors that auditors should be aware of and addresses the auditors’ 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.

Tom Ray, PCAOB Chief Auditor and Director of Professional Standards, said in the release, “The staff’s questions and answers were developed to help auditors apply the existing auditing standards to this area appropriately and consistently and I encourage auditors to review this guidance as they plan for calendar year-end audits.”

In July, the Board published Staff Audit Practice Alert No. 1 in response to reports about practices related to the granting of stock options, including the backdating of such grants.

The staff questions and answers, as well as the Staff Audit Practice Alert No. 1, can be viewed here .