Accounting For Stock Options

SFAS No. 123 (revised 2004), “Share- based Payment” (“SFAS 123(R)”), requires us to recognize compensation expense for all stock- based payment arrangements based on the fair value of the stock- based payment on the date of grant. In determining the fair value of stock options, we use the Black- Scholes option pricing model that employs the following assumptions:

• Expected term of the option based on historical employee stock option exercise behavior and the vesting and contractual terms of the respective option.
• Expected volatility of our stock price based on historical monthly volatility over the expected term.
• Risk- free interest rate for periods within the expected term of the option.
• Expected dividend yield.
• Expected option lives and our stock price volatility are based on management’s best estimates at the time of grant, both of which impact the fair value of the option calculated under the Black- Scholes methodology and, ultimately, the expense that will be recognized over the vesting term of the option.

SFAS 123(R) requires that we recognize compensation expense for only the portion of stock- based payment arrangements that are expected to vest.
Therefore, we apply estimated forfeiture rates that are based on historical employee termination behavior. We periodically adjust the estimated forfeiture rates so that only the compensation expense related to stock- based payment arrangements that vest are included in wages and benefits. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

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