Question

What date or event does the profession believe should be used in determining the value of a stock option? Please discuss the arguments that support this position. ALSO, As it relates to securities, explain why reclassifications adjustments are necessary. What is the fair value option? Present evidence and discuss one companies that uses the fair value option of accounting for investments.

Answer 1

Fair value Option ( FVO)- as per Financial Instrument IFRS 9 , FAIR VALUE option divided into two parts –

One fair value option – recognised on Amortised cost basis . This FV option applied in relates to debt Instrument . As per IFRS , We need to do Business Model test . As per Business model test , either Hold to collect or hold and sell the asset . In case of Hold the asset to collect contractual cash flow and do STTP test ( solely payment of principal test) then valuation is at amortized cost basis .

In other case , we used to follow FVOCI concept – this option use mainly fir Equity Instrument ( not held for trading purpose) . The entity can use the FVOCI option at initial recognition to designated the fair value through Other comprehensive Income ( OCI) . This can not be reconcycled ) . this should part of Equity Instrument

The entity can use the FV OPTION at initial recognition to designated the fair value through Profit and loss account .

As per IAS 39, FVO for a financial asset and financial liability ( or group of financial asset and liability) on initial recognition with changes in fair value recognised on Profit and loss account after meeting certain point

Value of Stock option in case of securities – A stock option represents a contract between two parties to buy and sale a stock at future time for a set price in practice .

The valuation of stock depends on multiple factor. When we do analysis of call option – this is the price at which the option buyer    can purchase the underlying stock. Where as other side Put option represents the strike price is the price at which the option holder can sale the stock . Strike / exercise price created a vital role while valuing stock option . In case strike price is highly speculative compared to the current stock value m the option is much more risky

Intrinsic value = With help of intrinsic value m we can determined whether matter is “ In the money “ or “ Out of the money” . In the money represent it allows the option holders to acquire stock at a discount price to current market value

Investor uses stock option as a tool with which to speculate on teh changes in price of an asset or financial Instrument Companies also use stock option in their own stock as an incentive to valuable employee

Most challenging in stock valuation would be to determine market value of stock when it will exercise

At present , there are several ways of estimating fair value of stock options. One of the most popular method to adopt “ Black Scholes Method”- This method help us to do the fair value of stock option .

While determined fair value of stock option, they considered constant dividend yield , a risk free rate of return , fixed volatility .This method mostly applicable in European market but not in US market

Public listed company can use lattice model to do fair stock valuation

Company implemented fair value option - selected 10k Audited report of " Pepsi Co " company and analysis the derivative risk factor and impact on financial ,,