CEP Financial Analysis & Reporting 2

Question 1

Under ASC 718, which method is required for estimating the fair value of employee stock options granted by public companies?

Accepted Answer

Option-pricing model such as Black-Scholes or lattice model

Answer

ASC 718 requires public companies to use an option-pricing model (e.g., Black-Scholes or a lattice/binomial model) to estimate fair value of stock options.

Question 2

A company grants RSUs with a cliff vesting schedule. How is the stock-based compensation expense recognized over the vesting period?

Accepted Answer

Ratably (straight-line) over the requisite service period

Answer

For awards with cliff vesting, straight-line recognition over the requisite service period is the default method under ASC 718.

Question 3

Which input to the Black-Scholes model reflects the market's expectation of future stock price volatility?

Accepted Answer

Expected volatility

Answer

Expected volatility captures how much the stock price is expected to fluctuate and is a key input to option fair value under Black-Scholes.

Question 4

When an employee forfeits unvested stock options before the vesting date, what is the accounting treatment?

Accepted Answer

Previously recognized expense is reversed; cumulative expense reflects only vested awards

Answer

Forfeitures result in reversal of previously recognized expense so that cumulative compensation cost equals the fair value of awards that actually vest.

Question 5

What effect does an increase in expected stock option term have on the Black-Scholes option value?

Accepted Answer

Increases value because there is more time for the stock to appreciate

Answer

A longer expected term gives the option more time for the underlying stock to move favorably, increasing its fair value.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Financial Analysis & Reporting 2