Expected Life After SAB 107 and SAB 110

One Approach to Estimating the Expected Term of Stock Options

Cindy W. Ma, PhD, CPA, CFA

The safe harbor rule of SEC Staff Accounting Bulletin 107 (SAB 107) allows companies to use the simplified method to estimate the expected term for employee stock options. Released in March 2005, SAB 107 was slated to sunset on December 31, 2007. Companies with no historical data to estimate the expected term expressed concern about what they would do after the expiration of SAB 107. On December 21, 2007, the SEC released SAB 110, which enables eligible companies—both publicly traded and privately held—to continue to use the simplified method. The SEC, however, has tightened the rules by permitting the use of the SAB 107 simplified method only if the company does not have sufficient historical exercise data to provide a reasonable basis for an estimate of the expected term.